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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
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: Dirt Mountain Racing Total Bikes Bikes Bikes Sales $926,000 $269,000 $403,000 $ 254,000 Variable manufacturing and selling 476,000 118,000 expenses 198,000 160,000 Contribution margin 450,000 151,000 205,000 94,000 Fixed expenses: Advertising, traceable 68,800 8,500 40,200 20,100 Depreciation of special equipment 43,200 20,200 7,200 15,800 Salaries of product-line managers 114,700 40,600 39,000 35, 100 Allocated common fixed expenses* 185,200 53,800 80,600 50,800 Total fixed expenses 411,900 123, 100 167,000 121,800 Net operating income (loss) $ 38,100 $ 27,900 $ 38,000 $(27,800) *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
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