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:

TotalDirt BikesMountain BikesRacing BikesSales$ 929,000$ 270,000$ 407,000$ 252,000Variable manufacturing and selling expenses464,000118,000194,000152,000Contribution margin465,000152,000213,000100,000Fixed expenses: Advertising, traceable70,1008,20040,90021,000Depreciation of special equipment43,40020,6007,70015,100Salaries of product-line managers115,70040,20038,60036,900Allocated common fixed expenses*185,80054,00081,40050,400Total fixed expenses415,000123,000168,600123,400Net operating income (loss)$ 50,000$ 29,000$ 44,400$ (23,400)

*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.

Troy Engines, Limited, 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, Limited, for a cost of $34 per unit. To evaluate this offer, Troy Engines, Limited, has gathered the following information relating to its own cost of producing the carburetor internally:

Per Unit21,000 Units per YearDirect materials$ 14$ 294,000Direct labor12252,000Variable manufacturing overhead242,000Fixed manufacturing overhead, traceable9*189,000Fixed manufacturing overhead, allocated12252,000Total cost$ 49$ 1,029,000

*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 21,000 carburetors from the outside supplier?

2. Should the outside suppliers offer be accepted?

3. Suppose that if the carburetors were purchased, Troy Engines, Limited, could use the freed capacity to launch a new product. The segment margin of the new product would be $210,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 21,000 carburetors from the outside supplier?

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