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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

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.

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