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	$	933,000		$	269,000		$	406,000		$	258,000
Variable manufacturing and selling expenses		473,000			114,000			208,000			151,000
Contribution margin		460,000			155,000			198,000			107,000
Fixed expenses:
Advertising, traceable		69,800			8,500			40,800			20,500
Depreciation of special equipment		43,800			20,500			7,600			15,700
Salaries of product-line managers		115,200			40,900			38,100			36,200
Allocated common fixed expenses*		186,600			53,800			81,200			51,600
Total fixed expenses		415,400			123,700			167,700			124,000
Net operating income (loss)	$	44,600		$	31,300		$	30,300		$	(17,000)

*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.