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	$	923,000		$	265,000		$	406,000		$	252,000
Variable manufacturing and selling expenses		471,000			114,000			203,000			154,000
Contribution margin		452,000			151,000			203,000			98,000
Fixed expenses:
Advertising, traceable		70,300			9,000			40,500			20,800
Depreciation of special equipment		43,600			20,300			7,700			15,600
Salaries of product-line managers		115,800			40,600			38,900			36,300
Allocated common fixed expenses*		184,600			53,000			81,200			50,400
Total fixed expenses		414,300			122,900			168,300			123,100
Net operating income (loss)	$	37,700		$	28,100		$	34,700		$	(25,100)

*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.

Required 1 Required 2 Required 3 What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes? Required 1 Required 2 Required 3 Should the production and sale of racing bikes be discontinued? Yes O No Required 1 Required 2 Required 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. Totals Dirt Bikes Mountain Bikes Racing Bikes Contribution margin (loss) Traceable fixed expenses: Total traceable fixed expenses Product line segment margin (loss) Net operating income (loss)