EXERCISE 12-2 Dropping or Retaining a Segment LO12-2 Regar Eycle 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 $300,000 $90,000 $150,000 $60,000 Sales Variable manufacturing and selling expenses Contribution margin 120,000 60,000 27,000 63,000 180,000 33,000 27,000 90,000 Fixed expenses: Advertising, traceable. Depreciation of special equipment Salaries of product-line managers. Allocated common fixed expenses* Total fixed expenses. Net operating income (loss). 30,000 23,000 35,000 60,000 148,000 $ 32,000 10,000 6,000 12,000 18,000 46,000 $17,000 14,000 9,000 13,000 30,000 6,000 8,000 10,000 12,000 66,000 $ 24,000 36,000 $ (9,000) "Allocated on the basis of sales dollars. Management is concerned about the continued losses shown by the racing bikes and wants a rec- ommendation 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 ? Should the production and sale of racing bikes be discontinued? 3. Prepare a properly formatted segmented income statement that would be more useful to man- agement in assessing the long-run profitability of the various product lines. Bikes