Exercise $11-2($Algo$)$ Dropping or Retaining a Segment $[$LO$11-2]$

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:

Total Dirt Bikes Mountain Bikes Racing Bikes

Sales $ $921,000$ $ $262,000$ $ $400,000$ $ $259,000$

Variable manufacturing and selling expenses $469,000114,000202,000153,000$

Contribution margin $452,000148,000198,000106,000$

Fixed expenses:

Advertising, traceable $70,0008,30040,80020,900$

Depreciation of special equipment $43,20020,2007,70015,300$

Salaries of product$-$line managers $113,60040,20038,40035,000$

Allocated common fixed expenses$*184,20052,40080,00051,800$

Total fixed expenses $411,000121,100166,900123,000$

Net operating income $($loss$)$ $ $41,000$ $ $26,900$ $ $31,100$ $ $(17,000)$

$*$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:

$1.$ 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.