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:

*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.

Dirt Mountain Racing Total Bikes Bikes Bikes Sales $ 930,000 $270,000 $ 402,000 $ 258,000 Variable manufacturing and selling expenses 459,000 113,000 190,000 156,000 Contribution margin 471,000 157,000 212,000 102,000 Fixed expenses: Advertising, traceable 68,900 8,200 40,300 20,400 Depreciation of special equipment 43,600 20,300 7,600 15,700 Salaries of product-line managers 115,500 40,000 39,000 36,500 Allocated common fixed expenses* 186,000 54,000 80,400 51,600 Total fixed expenses 414,000 122,500 167,300 124, 200 Net operating income (loss) $ 57,000 $ 34,500 $ 44,700 $(22,200)