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 $ 928,000 $265,000 $ 404,000 $ 259,000 468,000 110,000 207,000 151,000 460,000 155,000 197,000 108,000 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) 69,500 8,600 40,600 20,300 43,600 20,600 7,200 15,800 115,800 40,500 39,000 36,300 185,600 53,000 80,800 51,800 414,500 122, 700 167,600 124, 200 $ 45,500 $ 32,300 $ 29,400 $ (16,200)