1. The Regal Cycle Company manufactures three types of bicyclesa dirt bike, a mountain bike, and a racing bike. Data on sales and expenses for the past quarter follow:

	Total			Dirt Bikes			Mountain Bikes			Racing Bikes
Sales	$	927,000		$	268,000		$	407,000		$	252,000
Variable manufacturing and selling expenses		456,000			111,000			193,000			152,000
Contribution margin		471,000			157,000			214,000			100,000
Fixed expenses:
Advertising, traceable		69,900			8,300			40,700			20,900
Depreciation of special equipment		44,400			20,500			7,900			16,000
Salaries of product-line managers		116,200			40,900			38,400			36,900
Allocated common fixed expenses*		185,400			53,600			81,400			50,400
Total fixed expenses		415,900			123,300			168,400			124,200
Net operating income (loss)	$	55,100		$	33,700		$	45,600		$	(24,200)

*Allocated on the basis of sales dollars.

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:

1A. What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?

1B. Prepare a properly formatted segmented income statement that would be more useful to management in assessing the long-run profitability of the various product lines.

2.

Portsmouth Company makes upholstered furniture. Its only variable cost is direct materials. The demand for the company's products far exceeds its manufacturing capacity. The bottleneck (or constraint) in the production process is upholstery labor-hours. Information concerning three of Portsmouth's upholstered chairs appears below:

	Recliner			Sofa			Love Seat
Selling price per unit	$	1,410		$	1,830		$	1,370
Variable cost per unit	$	850		$	1,350		$	1,050
Upholstery labor-hours per unit	8 hours			12 hours			4 hours

Required:

2A. Portsmouth is considering paying its upholstery laborers hourly compensation, in addition to their usual salaries, to work overtime. Assuming that this extra time would be used to produce sofas, up to how much of an overtime premium per hour should the company be willing to pay to keep the upholstery shop open after normal working hours?

2B. A small nearby upholstering company has offered to upholster furniture for Portsmouth at a price of $36 per hour. The management of Portsmouth is confident that this upholstering companys work is high quality and their craftsmen can work as quickly as Portsmouths own craftsmen on the simpler upholstering jobs such as the Love Seat. How much additional contribution margin per hour can Portsmouth earn if it hires the nearby upholstering company to make Love Seats?