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.

Mountain Bikes Dirt Racing Bikes Bikes Total Sales Variable $921,000 $262,000 $402,000 $ 257,000 manufacturing and selling expenses Contribution margin Fixed expenses: Advertising, traceable 472,000 115,000 201,000 156,000 449,000 147,000 201,000 101,000 20,700 70,000 8,800 40,500 Depreciation of special equipment Salaries of 15,300 44,100 20,900 7,900 36,200 115,200 40,600 38,400 product-line managers Allocated common 184,200 52,400 80,400 51,400 fixed expenses Total fixed expenses 413,500 Net operating income s 35,500 $ 24,300 $ 33,800 $(22,600) (loss 122,700 167,200 123,600