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	$	922,000		$	262,000		$	402,000		$	258,000
Variable manufacturing and selling expenses		472,000			119,000			195,000			158,000
Contribution margin		450,000			143,000			207,000			100,000
Fixed expenses:
Advertising, traceable		69,200			8,300			40,200			20,700
Depreciation of special equipment		43,700			20,400			7,700			15,600
Salaries of product-line managers		114,800			40,300			38,500			36,000
Allocated common fixed expenses*		184,400			52,400			80,400			51,600
Total fixed expenses		412,100			121,400			166,800			123,900
Net operating income (loss)	$	37,900		$	21,600		$	40,200		$	(23,900)

*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.