1. What is the contribution margin lost if the production and sale of racing bikes are discontinued? Is the advertising (traceable) expense relevant in the decision-making? In other words, is the advertising (traceable) expenses avoidable if the production and sale of racing bikes are discontinued?

2. Is the depreciation of special equipment relevant in the decision-making? In other words, is the depreciation of special equipment avoidable if the production and sale of racing bikes are discontinued? Is allocated common fixed expenses relevant in the decision-making? In other words, is the allocated common fixed expenses avoidable if the production and sale of racing bikes are discontinued?

3. What are the fixed costs avoided if the production and sale of racing bikes are discontinued?

4.What is the effect on operating income per quarter if the company discontinues the Racing Bikes? (please use minus sign before the number if there is a decrease in operating income)..Should the production and sale of racing bikes be discontinued?

Exercise 2 Dropping or Retaining a Segment 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 Total Bikes Bikes $ 925,000 $267,000 $ 403,000 473,000 118,000 203,000 452,000 149,000 200,000 Racing Bikes $ 255,000 152,000 103,000 Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* Total fixed expenses Net operating income (loss) 69,500 8,600 43,700 20,400 115,500 40,500 185,000 53,400 413,700 122,900 38,300 $ 26,100 $ 40,500 20,400 7,800 15,500 38,400 36,600 80,600 51,000 167,300 123,500 32,700 $ (20,500) $ *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