Exercise 13-2 (Static) 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	$ 300,000	$ 90,000	$ 150,000	$ 60,000
Variable manufacturing and selling expenses	120,000	27,000	60,000	33,000
Contribution margin	180,000	63,000	90,000	27,000
Fixed expenses:
Advertising, traceable	30,000	10,000	14,000	6,000
Depreciation of special equipment	23,000	6,000	9,000	8,000
Salaries of product-line managers	35,000	12,000	13,000	10,000
Allocated common fixed expenses*	60,000	18,000	30,000	12,000
Total fixed expenses	148,000	46,000	66,000	36,000
Net operating income (loss)	$ 32,000	$ 17,000	$ 24,000	$ (9,000)

*Allocated on the basis of sales dollars.

Management is considering discontinuing the racing bikes. 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?