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	$	917,000		$	263,000		$	401,000		$	253,000
Variable manufacturing and selling expenses		469,000			116,000			198,000			155,000
Contribution margin		448,000			147,000			203,000			98,000
Fixed expenses:
Advertising, traceable		69,300			8,700			40,300			20,300
Depreciation of special equipment		43,600			20,600			7,600			15,400
Salaries of product-line managers		113,900			40,000			38,300			35,600
Allocated common fixed expenses*		183,400			52,600			80,200			50,600
Total fixed expenses		410,200			121,900			166,400			121,900
Net operating income (loss)	$	37,800		$	25,100		$	36,600		$	(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.

Exercise 11-2 Dropping or Retaining a Segment (LO11-2] The Regal Cycle Company manufactures three types of bicycles-a dirt bike, a mountain bike, and a racing bike. Data on sales and expenses for the past quarter follow: Dirt Mountain Racing Total Bikes Bikes Bikes $ 917,000 $263,000 $ 401,000 $ 253,000 469,000 116,000 198,000 155,000 448,000 147,000 203,000 98,000 Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses Total fixed expenses Net operating income (loss) 69,300 43,600 113,900 183,400 410,200 $ 37,800 8,700 20,600 40,000 52,600 121,900 25,100 40,300 20, 300 7,600 15,400 38,300 35,600 80,200 50,600 166,400 36,600 $ (23,900) 121,900 *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. Required 1 Required 2 Required 3 What is the financial advantage (disadvantage) per quarter of discontinuing the racing bikes? Financial (disadvantage) per quarter $ 27,300