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	$	921,000		$	262,000		$	406,000		$	253,000
Variable manufacturing and selling expenses		480,000			120,000			206,000			154,000
Contribution margin		441,000			142,000			200,000			99,000
Fixed expenses:
Advertising, traceable		70,100			8,700			40,500			20,900
Depreciation of special equipment		44,000			20,900			7,300			15,800
Salaries of product-line managers		114,900			40,500			38,800			35,600
Allocated common fixed expenses*		184,200			52,400			81,200			50,600
Total fixed expenses		413,200			122,500			167,800			122,900
Net operating income (loss)	$	27,800		$	19,500		$	32,200		$	(23,900)

*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:

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.