Exercise 12-2 Dropping or Retaining a Segment [LO12-2] The Regal Cycle Company manufactures three types of bicycles-a dirt bike, a mountain bike, and a racing bike. Data on sales and expenses for the past quarter follow: Racing Dirt Mountain Total Bikes Bikes Bikes Sales $926,000 $269,000 $404,000 $ 253,000 Variable manufacturing and selling 471,000 113,000 205,000 153,000 expenses Contribution margin Fixed expenses: 156,000 199,000 455,000 100,000 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses Total fixed expenses 40,100 20,800 69,300 43,700 115,300 185,200 413,500 $ 41,500 32,300 $31,800 $(22,600) 8,400 20,600 40,900 7,300 39,000 80,800 15,800 35,400 50,600 53,800 123,700 167,200 122,600 Net operating income (loss) *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. Required 1 Required 2 Required 3 What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes? Financial (disadvantage) per quarter (40,800) wwwwoo00x Should the production and sale of racing bikes be discontinued? OYes No 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. Totals Dirt Bikes Mountain Bikes Racing Bikes Sales Variable manufacturing and selling expenses Contribution margin (loss) Traceable fixed expenses: 926,000 $ $ 269,000 471,000 269,000 0 455,000 Advertising, traceable 68,800 Depreciation of special equipment 43,700 Salaries of the prod uct line managers Total traceable fixed expenses 115,000 227,500 0 0 0 227,500 $ 269,000 $ 0 Product line segment margin (loss) Common fixed expenses 1,852,000 (1,624,500) Net operating income (loss)