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		$	264,000		$	402,000		$	256,000
Variable manufacturing and selling expenses		480,000			118,000			204,000			158,000
Contribution margin		442,000			146,000			198,000			98,000
Fixed expenses:
Advertising, traceable		69,500			8,400			40,700			20,400
Depreciation of special equipment		43,700			20,600			7,600			15,500
Salaries of product-line managers		115,700			40,800			38,900			36,000
Allocated common fixed expenses*		184,400			52,800			80,400			51,200
Total fixed expenses		413,300			122,600			167,600			123,100
Net operating income (loss)	$	28,700		$	23,400		$	30,400		$	(25,100)

*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.