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	$	922,000		$	265,000		$	406,000		$	251,000
Variable manufacturing and selling expenses		479,000			113,000			208,000			158,000
Contribution margin		443,000			152,000			198,000			93,000
Fixed expenses:
Advertising, traceable		70,200			8,700			40,800			20,700
Depreciation of special equipment		44,100			20,900			7,700			15,500
Salaries of product-line managers		114,800			40,300			38,500			36,000
Allocated common fixed expenses*		184,400			53,000			81,200			50,200
Total fixed expenses		413,500			122,900			168,200			122,400
Net operating income (loss)	$	29,500		$	29,100		$	29,800		$	(29,400)

*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.