12.1

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	$	928,000		$	267,000		$	403,000		$	258,000
Variable manufacturing and selling expenses		463,000			112,000			196,000			155,000
Contribution margin		465,000			155,000			207,000			103,000
Fixed expenses:
Advertising, traceable		69,800			8,600			41,000			20,200
Depreciation of special equipment		43,600			20,100			7,800			15,700
Salaries of product-line managers		116,200			40,900			38,700			36,600
Allocated common fixed expenses*		185,600			53,400			80,600			51,600
Total fixed expenses		415,200			123,000			168,100			124,100
Net operating income (loss)	$	49,800		$	32,000		$	38,900		$	(21,100)

*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:

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

2. Should the production and sale of racing bikes be discontinued?

3. 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.