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	$	920,000		$	261,000		$	402,000		$	257,000
Variable manufacturing and selling expenses		459,000			111,000			192,000			156,000
Contribution margin		461,000			150,000			210,000			101,000
Fixed expenses:
Advertising, traceable		69,400			8,200			40,900			20,300
Depreciation of special equipment		43,800			20,300			7,600			15,900
Salaries of product-line managers		115,200			40,300			38,800			36,100
Allocated common fixed expenses*		184,000			52,200			80,400			51,400
Total fixed expenses		412,400			121,000			167,700			123,700
Net operating income (loss)	$	48,600		$	29,000		$	42,300		$	(22,700)

*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.