Exercise 6-2 (Algo) Dropping or Retaining a Segment [LO6-2]

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	$ 928,000	$ 269,000	$ 408,000	$ 251,000
Variable manufacturing and selling expenses	470,000	111,000	204,000	155,000
Contribution margin	458,000	158,000	204,000	96,000
Fixed expenses:
Advertising, traceable	69,100	8,200	40,400	20,500
Depreciation of special equipment	43,200	20,300	7,200	15,700
Salaries of product-line managers	114,700	40,400	38,800	35,500
Allocated common fixed expenses*	185,600	53,800	81,600	50,200
Total fixed expenses	412,600	122,700	168,000	121,900
Net operating income (loss)	$ 45,400	$ 35,300	$ 36,000	$ (25,900)

*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.