Exercise 11-2 Dropping or Retaining a Segment [LO11-2]

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	$	917,000		$	263,000		$	403,000		$	251,000
Variable manufacturing and selling expenses		461,000			115,000			191,000			155,000
Contribution margin		456,000			148,000			212,000			96,000
Fixed expenses:
Advertising, traceable		69,600			8,700			40,300			20,600
Depreciation of special equipment		43,500			20,700			7,400			15,400
Salaries of product-line managers		115,300			41,000			38,700			35,600
Allocated common fixed expenses*		183,400			52,600			80,600			50,200
Total fixed expenses		411,800			123,000			167,000			121,800
Net operating income (loss)	$	44,200		$	25,000		$	45,000		$	(25,800)

*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
Sales
Variable manufacturing and selling expenses
Contribution margin (loss)	0	0	0	0
Traceable fixed expenses:
Advertising
Depreciation of special equipment
Salaries of the product line managers
Total traceable fixed expenses	0	0	0	0
Product line segment margin (loss)	0	$0	$0	$0
Common fixed expenses
Net operating income (loss)	$