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	$ 933,000	$ 267,000	$ 409,000	$ 257,000
Variable manufacturing and selling expenses	475,000	118,000	197,000	160,000
Contribution margin	458,000	149,000	212,000	97,000
Fixed expenses:
Advertising, traceable	69,600	8,600	40,500	20,500
Depreciation of special equipment	43,800	20,900	7,400	15,500
Salaries of product-line managers	115,400	40,200	38,600	36,600
Allocated common fixed expenses*	186,600	53,400	81,800	51,400
Total fixed expenses	415,400	123,100	168,300	124,000
Net operating income (loss)	$ 42,600	$ 25,900	$ 43,700	$ (27,000)

*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.