Exercise 10-2 Dropping or Retaining a Segment [LO10-2]

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	$	915,000	$	263,000	$	402,000	$	250,000
Variable manufacturing and selling expenses		471,000		113,000		208,000		150,000
Contribution margin		444,000		150,000		194,000		100,000
Fixed expenses:
Advertising, traceable		69,400		8,200		40,800		20,400
Depreciation of special equipment		44,600		21,000		7,900		15,700
Salaries of product-line managers		114,700		40,800		38,700		35,200
Allocated common fixed expenses*		183,000		52,600		80,400		50,000
Total fixed expenses		411,700		122,600		167,800		121,300
Net operating income (loss)	$	32,300	$	27,400	$	26,200	$	(21,300)

*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:

1a.	What is the impact on net operating income by discontinuing racing bikes? (Decreases should be indicated by a minus sign.)

1b.

Should production and sale of the racing bikes be discontinued?

	Yes
	No

2a.	Prepare a segmented income statement.

2b.

Would a segmented income statement format be more usable to management in assessing the long-run profitability of the various product lines.

	Yes
	No