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	$ 923,000	$ 261,000	$ 403,000	$ 259,000
Variable manufacturing and selling expenses	466,000	118,000	196,000	152,000
Contribution margin	457,000	143,000	207,000	107,000
Fixed expenses:
Advertising, traceable	69,700	8,200	40,700	20,800
Depreciation of special equipment	43,600	20,300	7,500	15,800
Salaries of product-line managers	115,700	40,000	38,800	36,900
Allocated common fixed expenses*	184,600	52,200	80,600	51,800
Total fixed expenses	413,600	120,700	167,600	125,300
Net operating income (loss)	$ 43,400	$ 22,300	$ 39,400	$ (18,300)

*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:

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.