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:

*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.

Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses: Advertising, traceable Depreciation of special equipment salaries of product-line managers Allocated common fixed expenses* Total fixed expenses Net operating income (loss) Dirt Mountain Racing Total Bikes Bikes Bikes $ 926,000 $264,000 $410,000 $ 252,000 473,000 118,000 198,000 157,000 453,000 146,000 212,000 95,000 69.400 8.300 40.800 2 0.300 43,000 20, 300 7,600 15,100 116,200 40,200 39.000 32.000 185,200 52,800 82,000 50,400 413,800 121,600 169,400 122,000 $ 39,200 $ 24,400 $ 42,600 $(27,800) Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes? .. Required 2 > Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Should the production and sale of racing bikes be discontinued? Yes Required 1 Required 3 > Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 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. Totals Dirt Bikes Mountain Bikes Racing Bikes 0 0 Contribution margin (loss) Traceable fixed expenses: Total traceable fixed expenses Product line segment margin (loss) 0 0S 0S 0 0S 0 Net operating income (loss)