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Item 1

Exercise 6-2 (Algo) Dropping or Retaining a Segment [LO6-2]

The Regal Cycle Company manufactures three types of bicyclesa 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	$	920,000		$	268,000		$	401,000		$	251,000
Variable manufacturing and selling expenses		480,000			116,000			207,000			157,000
Contribution margin		440,000			152,000			194,000			94,000
Fixed expenses:
Advertising, traceable		69,800			8,300			40,800			20,700
Depreciation of special equipment		42,800			20,400			7,100			15,300
Salaries of product-line managers		115,300			40,700			38,300			36,300
Allocated common fixed expenses*		184,000			53,600			80,200			50,200
Total fixed expenses		411,900			123,000			166,400			122,500
Net operating income (loss)	$	28,100		$	29,000		$	27,600		$	(28,500)

*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.

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.