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 $928,000 $266,000 $409,000 $253,000

Variable manufacturing and selling expenses475,000 118,000 201,000 156,000

Contribution margin 453,000 148,000 208,000 97,000

Fixed expenses:

Advertising, traceable 69,600 8,900 40,400 20,300

Depreciation of special equipment 43,700 20,500 7,300 15,900

Salaries of product-line managers 115,800 40,000 39,000 36,800

Allocated common fixed expenses* 185,600 53,200 81,800 50,600

Total fixed expenses 414,700 122,600 168,500 123,600

Net operating income (loss) $38,300 $25,400 $39,500 $(26,600)

*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. make a properly formatted segmented income statement that would be more useful to management in assessing the long-run profitability of the various product lines.

make a properly formatted segmented income statement that would be more useful to management in assessing the long-run profitability of the various product lines.

Required 1.

What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?--- --

Required 2

Should the production and sale of racing bikes be discontinued? Yes or No

Required 3

make a properly formatted segmented income statement that would be more useful to management in assessing the long-run profitability of the various product lines

Totals Dirt Bikes Mountain Bikes Racing Bikes

---------------- ------- --------- ------------------ ---------------

----------------------------------- --------- --------- --------------- ---------------

contribution margin (loss) ---------- ---------- -------------- ---------------

Traceable fixed expenses ----------- ---------- -------------- ----------------

--------------------------------- ---------- ---------- -------------- ----------------

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Total traceable fixed expenses ------------ ------------ ---------------- ------------

product line segment margin (loss) --------- ---------- ------------ ----------

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Net operating income (loss) ------------

Drop down before contribution margin

• Advertising, traceable
• Common fixed expenses
• Depreciation of special equipment
• Salaries of the product line managers
• Sales
• Variable manufacturing and selling expenses

Drop down after traceable Fixed expenses

• Advertising, traceable
• Common fixed expenses
• Depreciation of special equipment
• Salaries of the product line managers
• Sales
• Variable manufacturing and selling expenses

Drop down after product line segment margin (loss)Advertising, traceable

• Common fixed expenses
• Depreciation of special equipment
• Salaries of the product line managers
• Sales
• Variable manufacturing and selling expenses