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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 Dirt1. 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
$ 915,000
$ 261,000
$ 402,000
$ 252,000
Variable manufacturing and selling expenses
478,000
118,000
207,000
153,000
Contribution margin
437,000
143,000
195,000
99,000
Fixed expenses:
Advertising, traceable
69,500
8,600
40,400
20,500
Depreciation of special equipment
43,100
20,100
7,200
15,800
Salaries of product-line managers
114,200
40,100
38,800
35,300
Allocated common fixed expenses*
183,000
52,200
80,400
50,400
Total fixed expenses
409,800
121,000
166,800
122,000
Net operating income (loss)
$ 27,200
$ 22,000
$ 28,200
$ (23,000)
*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.
Financial advantage (disadvantage) per quarter
Total
Dirt Bikes
Mountain Bikes
Racing Bikes
Contribution Margin (Loss)
Traceable Fixed Expenses:
Traceable Fixed Expenses
Product Line Segment Margin (Loss)
Net Operating Income (Loss) Bikes Mountain Bikes Racing Bikes Sales $ 300,000 $ 90,000 $ 150,000 $ 60,000 Variable manufacturing and selling expenses 120,00027,00060,00033,000

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