Exercise 11-2 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	$	914,000		$	262,000		$	401,000		$	251,000
Variable manufacturing and selling expenses		471,000			115,000			199,000			157,000
Contribution margin		443,000			147,000			202,000			94,000
Fixed expenses:
Advertising, traceable		70,000			8,600			40,500			20,900
Depreciation of special equipment		44,100			20,700			7,700			15,700
Salaries of product-line managers		114,400			40,600			38,400			35,400
Allocated common fixed expenses*		182,800			52,400			80,200			50,200
Total fixed expenses		411,300			122,300			166,800			122,200
Net operating income (loss)	$	31,700		$	24,700		$	35,200		$	(28,200)

*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.