Exercise 10-2 Dropping or Retaining a Segment [LO10-2]

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	$	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: 1a. What is the impact on net operating income by discontinuing racing bikes? (Decreases should be indicated by a minus sign.) Total If Current Total Racing Bikes Are Dropped Difference: Net Operating Income Increase or (Decrease) Contribution margin (loss) Fixed expenses Total fixed expenses Net operating income (loss) 1b. Should production and sale of the racing bikes be discontinued? Yes O No 2a. Prepare a segmented income statement. Totals Dirt Bikes Mountain Bikes Racing Bikes Contribution margin (loss) Traceable fixed expenses: Total traceable fixed expenses Net operating income (loss) 2b. Would a segmented income statement format be more usable to management in assessing the long- run profitability of the various product lines. Yes O No