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	$ 409,000	$ 250,000
Variable manufacturing and selling expenses	464,000	113,000	197,000	154,000
Contribution margin	464,000	156,000	212,000	96,000
Fixed expenses:
Advertising, traceable	69,900	8,200	40,800	20,900
Depreciation of special equipment	44,000	21,000	7,200	15,800
Salaries of product-line managers	114,800	40,700	38,800	35,300
Allocated common fixed expenses*Footnote asterisk	185,600	53,800	81,800	50,000
Total fixed expenses	414,300	123,700	168,600	122,000
Net operating income (loss)	$ 49,700	$ 32,300	$ 43,400	$ (26,000)

*Footnote asteriskAllocated 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.