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. 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.
 

Dirt Mountain Racing Total Bikes Bikes Bikes $300,000 $90,000 $150,000 $60,000 Sales .... Variable manufacturing and selling expenses 120,000 27,000 60,000 33,000 Contribution margin 180,000 63,000 90,000 27,000 Fixed expenses: Advertising, traceable.. Depreciation of special equipment Salaries of product-line managers 30,000 10,000 14,000 6,000 23,000 6,000 9,000 8,000 35,000 12,000 13,000 10,000 Allocated common fixed expenses". 60,000 18,000 30,000 12,000 Total fixed expenses.. 148,000 46,000 66,000 36,000 Net operating income (loss. . $ 32,000 $17,000 $ 24,000 $ (9.000) "Allocated on the basis of sales dollars.