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 $ $932,000$ $ $269,000$ $ $408,000$ $ $255,000$

Variable manufacturing and selling expenses $480,000119,000205,000156,000$

Contribution margin $452,000150,000203,00099,000$

Fixed expenses:

Advertising, traceable $68,8008,10040,20020,500$

Depreciation of special equipment $44,40020,8007,80015,800$

Salaries of product$-$line managers $115,70040,20038,70036,800$

Allocated common fixed expenses$*186,40053,80081,60051,000$

Total fixed expenses $415,300122,900168,300124,100$

Net operating income $($loss$)$ $ $36,700$ $ $27,100$ $ $34,700$ $ $(25,100)$

$*$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.

Totals Dirt Bikes Mountain Bikes Racing Bikes

Contribution margin $($loss$)0000$

Traceable fixed expenses:

Total traceable fixed expenses $0000$

Product line segment margin $($loss$)0$ $$0$ $$0$ $$0$

Net operating income $($loss$)$ $$0$

Required $2$