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The Regal Cycle Company manufactures three types of bicycles-a dirt bike, a mountain bike, and a racing bike. Data on sales and expenses for
The Regal Cycle Company manufactures three types of bicycles-a dirt bike, a mountain bike, and a racing bike. Data on sales and expenses for the past quarter follow: Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* Total fixed expenses Net operating income (loss) Allocated on the basis of sales dollars. Total $920,000 Dirt Bikes $264,000 Mountain Bikes. $ 402,000 Racing Bikes $ 254,000 470,000 114,000 202,000 154,000 450,000 150,000 200,000 100,000 70,000 8,700 41,000 20,300 43,500 20,400 7,600 15,500 114,600 40,500 38,700 35,400 184,000 52,800 80,400 50,800 412,100 122,400 167,700 122,000 $ 37,900 $ 27,600 $ 32,300 $ (22,000) 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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