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:

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	$	933,000		$	268,000		$	406,000		$	259,000
Variable manufacturing and selling expenses		471,000			113,000			206,000			152,000
Contribution margin		462,000			155,000			200,000			107,000
Fixed expenses:
Advertising, traceable		69,800			8,900			40,400			20,500
Depreciation of special equipment		42,900			20,200			7,200			15,500
Salaries of product-line managers		115,400			40,500			38,000			36,900
Allocated common fixed expenses*		186,600			53,600			81,200			51,800
Total fixed expenses		414,700			123,200			166,800			124,700
Net operating income (loss)	$	47,300		$	31,800		$	33,200		$	(17,700)

*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.

Explanation

1.

The financial (disadvantage) of discontinuing the racing bikes is computed as follows:

Lost contribution margin				$	(107,000)
Fixed costs that can be avoided:
Advertising, traceable	$	20,500
Salary of the product-line manager		36,900			57,400
Financial (disadvantage) of discontinuing the Racing BIkes				$	(49,600)

The depreciation of the special equipment is a sunk cost and is not relevant to the decision. The common costs are allocated and will continue regardless of whether or not the racing bikes are discontinued; thus, they are not relevant to the decision.

2.

No, production and sale of the racing bikes should not be discontinued.

Thanks