Exercise 12- 2 Dropping or Retaining a Segment

The Regal Cycle Company manufacturers three types of bicycles - a 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: $300,000 $90,000 $150,000 $60,000

Variable Manufacturing

and selling expenses 120,000 270,00 60,000 33,000

Contribution Margin 180,000 63,000 90,000 27,000

Fixed Expenses:

Advertising, Traceable 30,000 10,000 14,000 6,000

Depreciation of special

equipment 23,000 6,000 9,000 8,000

Salaries of product- line

managers 35,000 12,000 13,000 10,000

Allocated Common fixeds

expenses 60,000 18,000 30,000 12,000

Total Fixed Expenses 148,000 46,000 66,000 36,000

Net Operating Income (Loss) $32,000 $17,000 $24,000 ($9,000)

Management is concerned about the continued losses shown by the racing bikes and wants a recommendation as to weather or not the line should be discounted. The special equipment used to produce racing bikes has no resale value and does not wear out.

1. Should production and sale of the racing bikes be discontinued? Explain. Show computations to support my answer.
2. Recast the above data in a format that would be more unable to management in assessing the long- run profitability of the various product lines.