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	$	922,000		$	268,000		$	400,000		$	254,000
Variable manufacturing and selling expenses		468,000			116,000			198,000			154,000
Contribution margin		454,000			152,000			202,000			100,000
Fixed expenses:
Advertising, traceable		69,600			8,400			40,600			20,600
Depreciation of special equipment		44,500			20,700			8,000			15,800
Salaries of product-line managers		115,300			40,600			38,600			36,100
Allocated common fixed expenses*		184,400			53,600			80,000			50,800
Total fixed expenses		413,800			123,300			167,200			123,300
Net operating income (loss)	$	40,200		$	28,700		$	34,800		$	(23,300)

*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.

Prepare a properly formatted segmented income statement that would be more useful to management in assessing th run profitability of the various product lines. Totals Dirt Bikes Mountain Bikes Racing Bikes 0 0 0 0 Contribution margin (loss) Traceable fixed expenses: 0 0 0 Total traceable fixed expenses Product line segment margin (loss) 0 $ 0 $ 0 $ 0 Net operating income (loss)