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:

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.         Should production and sale of the racing bikes be discontinued? Explain. Show computations to support your answer.

2.         Recast the above data in a format that would be more usable to management in assessing the long-run profitability of the various product lines.

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Mountain Dirt Racing Total Bikes Bikes Bikes S300,000 $90,000 $150,000 Sales S60,000 Variable manufacturing and selling expenses 120,000 27,000 60,000 33,000 Contribution margin 63.000 180,000 90,000 27,000 Fixed expenses: Advertising, traceable 30,000 10,000 14,000 6,000 6,000 9,000 Depreciation of special equipment 23,000 8,000 Salaries of product-line managers 12,000 35,000 13,000 10,000 Allocated common fixed expenses* 60,000 18,000 30,000 12,000 Total fixed expenses 36,000 148,000 46,000 66,000 $ 24.000 $ 32,000 S (9,000) $17,000 Net operating income (loss) *Allocated on the basis of sales dollars.