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 $921,000 $261,000 $400,000 $260,000
Variable manufacturing and selling expenses 470,000 117,000 203,000 150,000
Contribution margin 451,000 144,000 197,000 110,000
Fixed expenses: Advertising, traceable 69,200 8,300 40,200 20,700
Depreciation of special equipment 44,100 20,500 7,700 15,900
Salaries of product-line managers 116,100 40,200 38,900 37,000
Allocated common fixed expenses (*) 184,200 52,200 80,000 52,000
Total fixed expenses 413,600 121,200 166,800 125,600
Net operating income (loss) $37,400 $22,800 $30,200 ($15,600)
(*) 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.