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	$	928,000	$	264,000	$	407,000	$	257,000
Variable manufacturing and selling expenses		468,000		116,000		199,000		153,000
Contribution margin		460,000		148,000		208,000		104,000
Fixed expenses:
Advertising, traceable		69,400		8,100		41,000		20,300
Depreciation of special equipment		44,400		20,900		7,600		15,900
Salaries of product-line managers		114,500		40,300		38,200		36,000
Allocated common fixed expenses*		185,600		52,800		81,400		51,400
Total fixed expenses		413,900		122,100		168,200		123,600
Net operating income (loss)	$	46,100	$	25,900	$	39,800	$	(19,600)

*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:

1a.	What is the impact on net operating income by discontinuing racing bikes? (Decreases should be indicated by a minus sign.)

1b.

Should production and sale of the racing bikes be discontinued?

	Yes
	No

2a.	Prepare a segmented income statement.

2b.

Would a segmented income statement format be more usable to management in assessing the long-run profitability of the various product lines.

	Yes
	No