12.acct

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	$	926,000		$	264,000		$	407,000		$	255,000
Variable manufacturing and selling expenses		479,000			115,000			209,000			155,000
Contribution margin		447,000			149,000			198,000			100,000
Fixed expenses:
Advertising, traceable		69,800			8,900			40,800			20,100
Depreciation of special equipment		44,400			20,800			8,000			15,600
Salaries of product-line managers		114,500			40,300			38,500			35,700
Allocated common fixed expenses*		185,200			52,800			81,400			51,000
Total fixed expenses		413,900			122,800			168,700			122,400
Net operating income (loss)	$	33,100		$	26,200		$	29,300		$	(22,400)

*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.