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