Reference no: EM132956086

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 Bikes                 Mountain Bikes                  Racing Bikes
Sales                                                         $ 919,000           $ 262,000                  $ 401,000                       $ 256,000
Variable manufacturing and selling expenses           470,000            112,000                      202,000                       156,000
Contribution margin                                               449,000           150,000                    199,000                          100,000
Fixed expenses:
Advertising, traceable                                              69,200                8,100                     40,500                             20,600
Depreciation of special equipment                              44,200                   20,800                    7,500                          15,900
Salaries of product-line managers                              115,100                  40,300                     38,200                       36,600
Allocated common fixed expenses                                 183,800                 52,400                     80,200                     51,200
Total fixed expenses                                                  412,300                   121,600                    166,400                 124,300
Net operating income (loss)                                           $ 36,700                  $ 28,400                  $ 32,600                $ (24,300)

• 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:

Problem 1. What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?

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

Problem 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.