The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a mountain bike, and aracing bike. Data on sales and expenses for the past quarter follow:Dirt Mountain RacingTotal Bikes Bikes BikesSales ............................................ $300,000 $90,000 $150,000 $60,000Variable manufacturingand selling expenses ................ 120,000 27,000 60,000 33,000Contribution margin ...................... 180,000 63,000 90,000 27,000Fixed expenses:Advertising, traceable ............... 30,000 10,000 14,000 6,000Depreciation of specialequipment ............................. 23,000 6,000 9,000 8,000Salaries of product-linemanagers .............................. 35,000 12,000 13,000 10,000Allocated common fixedexpenses* ............................. 60,000 18,000 30,000 12,000Total fixed expenses .................... 148,000 46,000 66,000 36,000Net operating income (loss) ......... $ 32,000 $17,000 $ 24,000 $ (9,000)*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 racingbikes has no resale value and does not wear out.Required:1. Should production and sale of the racing bikes be discontinued? Explain. Show computations tosupport your answer.2. Recast the above data in a format that would be more usable to management in assessing the long-runprofitability of the various product lines.

Question

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:
Dirt Mountain Racing
Total Bikes Bikes Bikes
Sales ............................................ $300,000 $90,000 $150,000 $60,000
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 ............... 30,000 10,000 14,000 6,000
Depreciation of special
equipment ............................. 23,000 6,000 9,000 8,000
Salaries of product-line
managers .............................. 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.
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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