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In: Accounting

The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a mountain bike, and a...

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 $ 931,000 $ 267,000 $ 409,000 $ 255,000
Variable manufacturing and selling expenses 469,000 113,000 203,000 153,000
Contribution margin 462,000 154,000 206,000 102,000
Fixed expenses:
Advertising, traceable 69,000 8,300 40,500 20,200
Depreciation of special equipment 44,600 20,900 7,900 15,800
Salaries of product-line managers 115,500 40,400 38,700 36,400
Allocated common fixed expenses* 186,200 53,400 81,800 51,000
Total fixed expenses 415,300 123,000 168,900 123,400
Net operating income (loss) $ 46,700 $ 31,000 $ 37,100 $ (21,400)

*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.

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