Exercise 13-2 (Algo) Dropping or Retaining a Segment [LO13-2]

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	$ 939,000	$ 270,000	$ 410,000	$ 259,000
Variable manufacturing and selling expenses	465,000	117,000	198,000	150,000
Contribution margin	474,000	153,000	212,000	109,000
Fixed expenses:
Advertising, traceable	69,500	8,200	40,300	21,000
Depreciation of special equipment	43,700	20,900	7,600	15,200
Salaries of product-line managers	114,600	40,200	38,400	36,000
Allocated common fixed expenses*	187,800	54,000	82,000	51,800
Total fixed expenses	415,600	123,300	168,300	124,000
Net operating income (loss)	$ 58,400	$ 29,700	$ 43,700	$ (15,000)

*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.