Exercise 11-2 Dropping or Retaining a Segment [LO11-2]

	Total			Dirt Bikes			Mountain Bikes			Racing Bikes
Sales	$	931,000		$	267,000		$	408,000		$	256,000
Variable manufacturing and selling expenses		464,000			112,000			193,000			159,000
Contribution margin		467,000			155,000			215,000			97,000
Fixed expenses:
Advertising, traceable		69,800			8,500			40,900			20,400
Depreciation of special equipment		44,000			21,000			7,300			15,700
Salaries of product-line managers		115,400			40,800			38,400			36,200
Allocated common fixed expenses*		186,200			53,400			81,600			51,200
Total fixed expenses		415,400			123,700			168,200			123,500
Net operating income (loss)	$	51,600		$	31,300		$	46,800		$	(26,500)

*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.