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	$ 924,000	$ 263,000	$ 406,000	$ 255,000
Variable manufacturing and selling expenses	467,000	115,000	199,000	153,000
Contribution margin	457,000	148,000	207,000	102,000
Fixed expenses:
Advertising, traceable	68,600	8,200	40,100	20,300
Depreciation of special equipment	42,900	20,300	7,200	15,400
Salaries of product-line managers	113,400	40,200	38,100	35,100
Allocated common fixed expenses*	184,800	52,600	81,200	51,000
Total fixed expenses	409,700	121,300	166,600	121,800
Net operating income (loss)	$ 47,300	$ 26,700	$ 40,400	$ (19,800)

*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.

Complete this question by entering your answers in the tabs below. 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