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 $ 923,000 $ 261,000 $ 409,000 $ 253,000
Variable manufacturing and selling expenses 468,000 110,000 201,000 157,000
Contribution margin 455,000 151,000 208,000 96,000
Fixed expenses:
Advertising, traceable 70,000 8,700 40,500 20,800
Depreciation of special equipment 42,700 20,400 7,200 15,100
Salaries of product-line managers 115,600 40,300 38,700 36,600
Allocated common fixed expenses* 184,600 52,200 81,800 50,600
Total fixed expenses 412,900 121,600 168,200 123,100
Net operating income (loss) $ 42,100 $ 29,400 $ 39,800 $ (27,100)
*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.