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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 $ 924,000 Dirt Bikes $ 263,000 Mountain Bikes $ 406,000 Racing Bikes $ 255,000 467,000 114,000 194,000 159,000 457,000 149,000 212,000 96,000 70,400 8,900 41,000 20,500 43,000 20,700 7,100 15,200 114,000 40,700 38,100 35,200 184,800 52,600 81,200 51,000 412,200 122,900 167,400 121,900 $ 44,800 $ 26,100 $ 44,600 $ (25,900) 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. Complete this question by entering your answers in the tabs below.
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