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:

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.

Dirt Mountain Racing Bikes Total Bikes Bikes $919,000 $264,000 $ 401,000 $ 254,000 152,000 102,000 Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses: 478,000 118,000 208,000 441,000 146,000 193,000 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocatedcommon fixed expenses* 8,400 20,100 40,600 52,800 412,500 121,900 167,400 40,700 7,500 39,000 80,200 69,600 20,500 15,100 36,800 50,800 123,200 $ 28,500 24,100 $ 25,600 $(21,200) 42,700 20 116,400 183,800 Total fixed expenses Net operating income (loss)