BRIEF EXERCISE 11–2 Dropping or Retaining a Segment [LO2]

The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a mountain bike, and a racing bike. Data on sales and expenses for the past quarter follow:

Dirt Mountain Racing Total Bikes Bikes 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 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. Should production and sale of the racing bikes be discontinued? Explain. Show computations to support your answer.

2. Recast the above data in a format that would be more usable to management in assessing the long-run profitability of the various product lines.