Question

In: Accounting

expenses for the past quarter follow: Total Dirt Bikes Mountain Bikes Racing Bikes Sales $ 935,000...

expenses for the past quarter follow:

Total Dirt
Bikes
Mountain Bikes Racing
Bikes
Sales $ 935,000 $ 269,000 $ 409,000 $ 257,000
Variable manufacturing and selling expenses 483,000 116,000 208,000 159,000
Contribution margin 452,000 153,000 201,000 98,000
Fixed expenses:
Advertising, traceable 69,300 8,700 40,300 20,300
Depreciation of special equipment 44,100 20,800 7,800 15,500
Salaries of product-line managers 114,500 40,600 38,800 35,100
Allocated common fixed expenses* 187,000 53,800 81,800 51,400
Total fixed expenses 414,900 123,900 168,700 122,300
Net operating income (loss) $ 37,100 $ 29,100 $ 32,300 $ (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:

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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