Question

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	$	935,000		$	269,000		$	408,000		$	258,000
Variable manufacturing and selling expenses		472,000			118,000			203,000			151,000
Contribution margin		463,000			151,000			205,000			107,000
Fixed expenses:
Advertising, traceable		69,500			8,400			40,600			20,500
Depreciation of special equipment		43,800			21,000			7,300			15,500
Salaries of product-line managers		114,900			40,800			38,900			35,200
Allocated common fixed expenses*		187,000			53,800			81,600			51,600
Total fixed expenses		415,200			124,000			168,400			122,800
Net operating income (loss)	$	47,800		$	27,000		$	36,600		$	(15,800)

*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.

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

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Should the production and sale of racing bikes be discontinued?

	Yesradio button unchecked1 of 2 Noradio button unchecked2 of 2

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.

	Totals Dirt Bikes Mountain Bikes Racing Bikes Contribution margin (loss) 0 0 0 0 Traceable fixed expenses: Total traceable fixed expenses 0 0 0 0 Product line segment margin (loss) 0 $0 $0 $0 Net operating income (loss) $0

Answer 1