Exercise 12-2 Dropping or Retaining a Segment [LO12-2]

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	$	924,000		$	269,000		$	402,000		$	253,000
Variable manufacturing and selling expenses		478,000			117,000			207,000			154,000
Contribution margin		446,000			152,000			195,000			99,000
Fixed expenses:
Advertising, traceable		70,100			8,500			40,800			20,800
Depreciation of special equipment		42,700			20,100			7,300			15,300
Salaries of product-line managers		114,900			40,600			38,200			36,100
Allocated common fixed expenses*		184,800			53,800			80,400			50,600
Total fixed expenses		412,500			123,000			166,700			122,800
Net operating income (loss)	$	33,500		$	29,000		$	28,300		$	(23,800)

*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.

1.What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?

Financial (advantage/disadvantage)=

2. Should the production and sale of racing bikes be discontinued?

yes/no

3.

Totals	Dirt Bikes	Mountain Bikes	Racing Bikes
Contribution margin (loss)	0	0	0	0
Traceable fixed expenses:
Total traceable fixed expenses	0	0	0	0
Product line segment margin (loss)	0	$0	$0	$0
Net operating income (loss)	$0