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	$	931,000	$	265,000	$	406,000	$	260,000
Variable manufacturing and selling expenses		467,000		112,000		197,000		158,000
Contribution margin		464,000		153,000		209,000		102,000
Fixed expenses:
Advertising, traceable		69,700		8,800		40,200		20,700
Depreciation of special equipment		43,900		20,600		7,500		15,800
Salaries of product-line managers		114,100		40,600		38,400		35,100
Allocated common fixed expenses*		186,200		53,000		81,200		52,000
Total fixed expenses		413,900		123,000		167,300		123,600
Net operating income (loss)	$	50,100	$	30,000	$	41,700	$	(21,600)

*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.

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