Exercise 11-2 (Algo) Dropping or Retaining a Segment [LO11-2]

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	$ 916,000	$ 262,000	$ 402,000	$ 252,000
Variable manufacturing and selling expenses	480,000	117,000	204,000	159,000
Contribution margin	436,000	145,000	198,000	93,000
Fixed expenses:
Advertising, traceable	69,100	8,200	40,700	20,200
Depreciation of special equipment	43,800	20,300	7,900	15,600
Salaries of product-line managers	115,700	40,100	38,800	36,800
Allocated common fixed expenses*	183,200	52,400	80,400	50,400
Total fixed expenses	411,800	121,000	167,800	123,000
Net operating income (loss)	$ 24,200	$ 24,000	$ 30,200	$ (30,000)

*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.

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.