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	$ 929,000	$ 270,000	$ 405,000	$ 254,000
Variable manufacturing and selling expenses	456,000	114,000	190,000	152,000
Contribution margin	473,000	156,000	215,000	102,000
Fixed expenses:
Advertising, traceable	70,600	8,900	41,000	20,700
Depreciation of special equipment	43,900	20,700	7,200	16,000
Salaries of product-line managers	115,200	40,600	38,500	36,100
Allocated common fixed expenses*	185,800	54,000	81,000	50,800
Total fixed expenses	415,500	124,200	167,700	123,600
Net operating income (loss)	$ 57,500	$ 31,800	$ 47,300	$ (21,600)

*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:

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.