Reference no: EM132587764

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:

                                                                               Total                          Dirt                    Mountain                  Racing

                                                                                                                       Bike                      Bike                       Bike

Sales                                                         $925,000                   $267,000           $ 407,000          $251,000

Variable manufacturing and selling expenses          468,000                    116,000            200,000               152,000

Contribution margin                                           457,000                       151,000          207,000         99,000

Fixed expenses:

Advertising, traceable                                             69,300                       8,700            40,300              20,300

Depreciation of special equipment                                44,000                      20,800            8,000              15,200

Salaries of product-line managers                             114,100                          40,100             38,600            35,400

Allocated common fixed expenses                                  185,000                        53,400            81,400           50,200

Total fixed expenses                                                         412,400                    123,000           168,300       121,100

Net operating income (loss)                                         $44,600                          $28,000             $38,700       $(22,100)

• 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:

Question 1. What is the financial advantage (disadvantage) per quarter of discontinuing the racing bikes?

Question 2. Should the production and sale of racing bikes be discontinued?

Question 3. Create a properly formatted segmented income statement that would be more useful to management in assessing the long-run profitability of the various product lines.