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	$	929,000		$	268,000		$	409,000		$	252,000
Variable manufacturing and selling expenses		463,000			114,000			198,000			151,000
Contribution margin		466,000			154,000			211,000			101,000
Fixed expenses:
Advertising, traceable		68,900			8,300			40,400			20,200
Depreciation of special equipment		43,700			20,900			7,200			15,600
Salaries of product-line managers		113,900			40,400			38,100			35,400
Allocated common fixed expenses*		185,800			53,600			81,800			50,400
Total fixed expenses		412,300			123,200			167,500			121,600
Net operating income (loss)	$	53,700		$	30,800		$	43,500		$	(20,600)

*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.