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	$ 918,000	$ 264,000	$ 402,000	$ 252,000
Variable manufacturing and selling expenses	463,000	119,000	194,000	150,000
Contribution margin	455,000	145,000	208,000	102,000
Fixed expenses:
Advertising, traceable	69,900	8,600	40,400	20,900
Depreciation of special equipment	44,000	20,600	7,700	15,700
Salaries of product-line managers	115,500	40,600	38,500	36,400
Allocated common fixed expenses*	183,600	52,800	80,400	50,400
Total fixed expenses	413,000	122,600	167,000	123,400
Net operating income (loss)	$ 42,000	$ 22,400	$ 41,000	$ (21,400)

*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?

Yes or no

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.

	Totals	Dirt Bikes	Mountain Bikes	Racing Bikes
Contribution margin (loss)	0	0	0	0
Traceable fixed expenses:
Total traceable fixed expenses	0	0	0	0
Product line segment margin (loss)	0	$0	$0	$0
Net operating income (loss)	$0