Question

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 $ 925,000 $ 270,000 $ 401,000 $ 254,000
Variable manufacturing and selling expenses 464,000    111,000 196,000    157,000   
Contribution margin 461,000 159,000 205,000 97,000
Fixed expenses:
Advertising, traceable 68,900 8,300 40,200 20,400
Depreciation of special equipment 44,100 20,800 7,700 15,600
Salaries of product-line managers 114,800 40,100 38,900 35,800
Allocated common fixed expenses* 185,000 54,000 80,200 50,800
Total fixed expenses 412,800 123,200 167,000 122,600
Net operating income (loss) $ 48,200 $ 35,800 $ 38,000 $ (25,600)

*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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