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		$	268,000		$	401,000		$	253,000
Variable manufacturing and selling expenses		468,000			113,000			200,000			155,000
Contribution margin		454,000			155,000			201,000			98,000
Fixed expenses:
Advertising, traceable		70,500			8,600			40,900			21,000
Depreciation of special equipment		44,100			20,900			7,900			15,300
Salaries of product-line managers		114,600			40,900			38,300			35,400
Allocated common fixed expenses*		184,400			53,600			80,200			50,600
Total fixed expenses		413,600			124,000			167,300			122,300
Net operating income (loss)	$	40,400		$	31,000		$	33,700		$	(24,300)

*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.