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Item 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	$ 264,000	$ 408,000	$ 256,000
Variable manufacturing and selling expenses	472,000	117,000	200,000	155,000
Contribution margin	456,000	147,000	208,000	101,000
Fixed expenses:
Advertising, traceable	70,200	8,800	40,500	20,900
Depreciation of special equipment	43,500	20,300	7,400	15,800
Salaries of product-line managers	114,200	40,700	38,300	35,200
Allocated common fixed expenses*	185,600	52,800	81,600	51,200
Total fixed expenses	413,500	122,600	167,800	123,100
Net operating income (loss)	$ 42,500	$ 24,400	$ 40,200	$ (22,100)

*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.