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	$ 922,000	$ 262,000	$ 409,000	$ 251,000
Variable manufacturing and selling expenses	476,000	112,000	205,000	159,000
Contribution margin	446,000	150,000	204,000	92,000
Fixed expenses:
Advertising, traceable	69,300	8,300	40,400	20,600
Depreciation of special equipment	44,300	20,500	7,900	15,900
Salaries of product-line managers	114,700	40,900	38,200	35,600
Allocated common fixed expenses*	184,400	52,400	81,800	50,200
Total fixed expenses	412,700	122,100	168,300	122,300
Net operating income (loss)	$ 33,300	$ 27,900	$ 35,700	$ (30,300)

*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.