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:

	Total			Dirt Bikes			Mountain Bikes			Racing Bikes
Sales	$	928,000		$	267,000		$	409,000		$	252,000
Variable manufacturing and selling expenses		474,000			117,000			203,000			154,000
Contribution margin		454,000			150,000			206,000			98,000
Fixed expenses:
Advertising, traceable		69,500			8,700			40,500			20,300
Depreciation of special equipment		43,300			20,200			7,200			15,900
Salaries of product-line managers		114,900			40,000			38,100			36,800
Allocated common fixed expenses*		185,600			53,400			81,800			50,400
Total fixed expenses		413,300			122,300			167,600			123,400
Net operating income (loss)	$	40,700		$	27,700		$	38,400		$	(25,400)

*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.