Exercise $13-2($Static$)$ Dropping or Retaining a Segment $[$LO$13-2]$

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 $ $300,000$ $ $90,000$ $ $150,000$ $ $60,000$

Variable manufacturing and selling expenses $120,00027,00060,00033,000$

Contribution margin $180,00063,00090,00027,000$

Fixed expenses:

Advertising, traceable $30,00010,00014,0006,000$

Depreciation of special equipment $23,0006,0009,0008,000$

Salaries of product$-$line managers $35,00012,00013,00010,000$

Allocated common fixed expenses$*60,00018,00030,00012,000$

Total fixed expenses $148,00046,00066,00036,000$

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.

Exercise $13-2($Static$)$ Dropping or Retaining a Segment $[$LO$13-2]$

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:

$*$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:

What is the financial advantage $($disadvantage$)$ per quarter of discontinuing the Racing Bikes?

Should the production and sale of racing bikes be discontinued?

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.

$1.$ 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.