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:

TotalDirt

BikesMountain BikesRacing

BikesSales$919,000$266,000$401,000$252,000Variable manufacturing and selling expenses485,000119,000209,000157,000Contribution margin434,000147,000192,00095,000Fixed expenses:Advertising, traceable69,6008,70040,30020,600Depreciation of special equipment43,90020,9007,30015,700Salaries of product-line managers115,30040,70038,50036,100Allocated common fixed expenses*183,80053,20080,20050,400Total fixed expenses412,600123,500166,300122,800Net operating income (loss)$21,400$23,500$25,700$(27,800)

*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. make a properly formatted segmented income statement that would be more useful to management in assessing the long-run profitability of the various product lines.