Exercise 12-2 Dropping or Retaining a Segment [LO12-2] 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: Dirt Bikes $ 262,000 110,000 Total $ 921,000 474,000 Mountain Bikes $ 404,000 207,000 Racing Bikes $ 255,000 157,000 Sales Variable manufacturing and selling expenses Contribution margin 447,000 152,000 197,000 98,000 Fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* 70,600 43,600 114,800 184,200 8,800 20,600 40,100 52,400 40,900 7,100 38,700 80,800 20,900 15,900 36,000 51,000 Total fixed expenses 413,200 121,900 167,500 123,800 Net operating income (loss) $ 33,800 $ 30,100 $ 29,500 $ (25,800) *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: 1a. What is the impact on net operating income by discontinuing racing bikes? (Decreases should be indicated by a minus sign.) Total If Current Total Racing Bikes Are Dropped Difference: Net Operating Income Increase or (Decrease) Contribution margin (loss) Fixed expenses: Total fixed expenses Net operating income (loss) 1b. Should production and sale of the racing bikes be discontinued? O Yes O No 2a. Prepare a segmented income statement. Totals Dirt Bikes Mountain Bikes Racing Bikes Contribution margin (loss) Traceable fixed expenses: Total traceable fixed expenses Net operating income (loss) 2b. Would a segmented income statement format be more usable to management in assessing the long- run profitability of the various product lines. O Yes O No