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	$	919,000	$	262,000	$	401,000	$	256,000
Variable manufacturing and selling expenses		468,000		119,000		194,000		155,000
Contribution margin		451,000		143,000		207,000		101,000
Fixed expenses:
Advertising, traceable		69,300		8,400		40,500		20,400
Depreciation of special equipment		43,100		20,300		7,400		15,400
Salaries of product-line managers		115,500		40,900		38,700		35,900
Allocated common fixed expenses*		183,800		52,400		80,200		51,200
Total fixed expenses		411,700		122,000		166,800		122,900
Net operating income (loss)	$	39,300	$	21,000	$	40,200	$	(21,900)

*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