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	$	923,000	$	263,000	$	405,000	$	255,000
Variable manufacturing and selling expenses		464,000		114,000		191,000		159,000
Contribution margin		459,000		149,000		214,000		96,000
Fixed expenses:
Advertising, traceable		69,500		8,600		40,800		20,100
Depreciation of special equipment		43,800		20,600		7,600		15,600
Salaries of product-line managers		115,200		40,600		38,300		36,300
Allocated common fixed expenses*		184,600		52,600		81,000		51,000
Total fixed expenses		413,100		122,400		167,700		123,000
Net operating income (loss)	$	45,900	$	26,600	$	46,300	$	(27,000)

*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.)

1b.

Should production and sale of the racing bikes be discontinued?

	Yes
	No

2a.	Prepare a segmented income statement.

2b.

Would a segmented income statement format be more usable to management in assessing the long-run profitability of the various product lines.

	Yes
	No