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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: Total Dirt Bikes Mountain Bikes Racing Bikes Sales $ 927,000 $ 268,000 $ 402,000 $ 257,000 Variable manufacturing and selling expenses 464,000 112,000 201,000 151,000 Contribution margin 463,000 156,000 201,000 106,000 Fixed expenses: Advertising, traceable 69,000 8,600 40,200 20,200 Depreciation of special equipment 44,300 20,600 8,000 15,700 Salaries of product-line managers 114,400 40,300 38,700 35,400 Allocated common fixed expenses* 185,400 53,600 80,400 51,400 Total fixed expenses 413,100 123,100 167,300 122,700 Net operating income (loss) $ 49,900 $ 32,900 $ 33,700 $ (16,700) *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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