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 $ 929,000 $ 267,000 $ 410,000 $ 252,000

Variable manufacturing and selling expenses 468,000 115,000 198,000 155,000

Contribution margin 461,000 152,000 212,000 97,000

Fixed expenses:

Advertising, traceable 68,900 8,400 40,200 20,300

Depreciation of special equipment 43,000 20,400 7,500 15,100

Salaries of product-line managers 114,400 40,700 38,500 35,200

Allocated common fixed expenses*Footnote asterisk 185,800 53,400 82,000 50,400

Total fixed expenses 412,100 122,900 168,200 121,000

Net operating income (loss) $ 48,900 $ 29,100 $ 43,800 $ (24,000)

*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: What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?