A.

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	$	932,000		$	268,000		$	405,000		$	259,000
Variable manufacturing and selling expenses		477,000			112,000			210,000			155,000
Contribution margin		455,000			156,000			195,000			104,000
Fixed expenses:
Advertising, traceable		70,200			8,600			41,000			20,600
Depreciation of special equipment		44,100			20,700			7,600			15,800
Salaries of product-line managers		115,500			40,900			38,900			35,700
Allocated common fixed expenses*		186,400			53,600			81,000			51,800
Total fixed expenses		416,200			123,800			168,500			123,900
Net operating income (loss)	$	38,800		$	32,200		$	26,500		$	(19,900)

*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.

B.

Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment. The company has always produced all of the necessary parts for its engines, including all of the carburetors. An outside supplier has offered to sell one type of carburetor to Troy Engines, Ltd., for a cost of $35 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally:

	Per Unit				16,000 Units per Year
Direct materials	$	13		$	208,000
Direct labor		13			208,000
Variable manufacturing overhead		2			32,000
Fixed manufacturing overhead, traceable		9	*		144,000
Fixed manufacturing overhead, allocated		12			192,000
Total cost	$	49		$	784,000

*One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value).

Required:

1. Assuming the company has no alternative use for the facilities that are now being used to produce the carburetors, what would be the financial advantage (disadvantage) of buying 16,000 carburetors from the outside supplier?

2. Should the outside suppliers offer be accepted?

3. Suppose that if the carburetors were purchased, Troy Engines, Ltd., could use the freed capacity to launch a new product. The segment margin of the new product would be $160,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 16,000 carburetors from the outside supplier?

4. Given the new assumption in requirement 3, should the outside suppliers offer be accepted?