Question

The Regal Cycle Company manufactures three types of bicycles—adirt bike, a mountain bike, and a racing bike. Data on sales andexpenses for the past quarter follow:

	Total			Dirt Bikes			Mountain Bikes			Racing Bikes
Sales	$	930,000		$	269,000		$	402,000		$	259,000
Variable manufacturing and selling expenses		467,000			117,000			192,000			158,000
Contribution margin		463,000			152,000			210,000			101,000
Fixed expenses:
Advertising, traceable		70,500			8,800			41,000			20,700
Depreciation of special equipment		42,500			20,200			7,100			15,200
Salaries of product-line managers		115,100			40,700			38,800			35,600
Allocated common fixed expenses*		186,000			53,800			80,400			51,800
Total fixed expenses		414,100			123,500			167,300			123,300
Net operating income (loss)	$	48,900		$	28,500		$	42,700		$	(22,300)

*Allocated on the basis of sales dollars.

Management is concerned about the continued losses shown by theracing bikes and wants a recommendation as to whether or not theline should be discontinued. The special equipment used to produceracing bikes has no resale value and does not wear out.

Required:

1. What is the financial advantage (disadvantage) per quarter ofdiscontinuing the Racing Bikes?

2. Should the production and sale of racing bikes bediscontinued?

3. Prepare a properly formatted segmented income statement thatwould be more useful to management in assessing the long-runprofitability of the various product lines.