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	$	926,000		$	263,000		$	410,000		$	253,000
Variable manufacturing and selling expenses		469,000			116,000			195,000			158,000
Contribution margin		457,000			147,000			215,000			95,000
Fixed expenses:
Advertising, traceable		70,000			8,600			40,600			20,800
Depreciation of special equipment		44,000			20,700			7,800			15,500
Salaries of product-line managers		114,500			40,500			38,300			35,700
Allocated common fixed expenses*		185,200			52,600			82,000			50,600
Total fixed expenses		413,700			122,400			168,700			122,600
Net operating income (loss)	$	43,300		$	24,600		$	46,300		$	(27,600)

*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.