E4–8 Time allowed: 20 minutes The Regal Cycle Company manufactures three types of bicycles – a dirt bike, a mountain bike and a racing bike. Data on sales and expenses for the past quarter follow:

Management is concerned about the continued losses shown by the racing bikes and wants a recommendation as to whether or not the line should be discontinued. The special equipment used to produce racing bikes has no resale value and does not wear out.
Required 1 Should production and sale of the racing bikes be discontinued? Show computations to support your answer.
2 Recast the above data in a format that would be more usable to management in assessing the long-run profitability of the various product lines.

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Total Dirt bikes Mountain Racing bikes bikes Sales 300,000 90,000 150,000 60,000 Less variable manufacturing and selling expenses 120,000 27,000 60,000 33,000 Contribution margin 180,000 63,000 90,000 27,000 Less fixed expenses: Advertising, traceable 30,000 10,000 14,000 6,000 Depreciation of special equipment 23,000 6,000 9,000 8,000 Salaries of product-line managers 35,000 12,000 13,000 10,000 Common allocated costs* 60,000 18,000 30,000 12,000 Total fixed expenses 148.000 46.000 66,000 36,000 Net operating income (loss) 32,000 17,000 24,000 (9,000) "Allocated on the basis of sales.