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	$	930,000		$	270,000		$	407,000		$	253,000
Variable manufacturing and selling expenses		467,000			119,000			192,000			156,000
Contribution margin		463,000			151,000			215,000			97,000
Fixed expenses:
Advertising, traceable		69,400			8,600			40,300			20,500
Depreciation of special equipment		43,300			20,500			7,400			15,400
Salaries of product-line managers		114,100			40,100			38,600			35,400
Allocated common fixed expenses*		186,000			54,000			81,400			50,600
Total fixed expenses		412,800			123,200			167,700			121,900
Net operating income (loss)	$	50,200		$	27,800		$	47,300		$	(24,900)

*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?

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.

Complete this question by entering your answers in the tabs below.

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
Contribution margin (loss)
Traceable fixed expenses:
Total traceable fixed expenses
Product line segment margin (loss)
Net operating income (loss)