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	$	923,000		$	263,000		$	403,000		$	257,000
Variable manufacturing and selling expenses		482,000			120,000			206,000			156,000
Contribution margin		441,000			143,000			197,000			101,000
Fixed expenses:
Advertising, traceable		69,600			8,500			40,200			20,900
Depreciation of special equipment		43,300			20,600			7,200			15,500
Salaries of product-line managers		115,500			40,700			38,100			36,700
Allocated common fixed expenses*		184,600			52,600			80,600			51,400
Total fixed expenses		413,000			122,400			166,100			124,500
Net operating income (loss)	$	28,000		$	20,600		$	30,900		$	(23,500)

*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.

Complete this question by entering your answers in the tabs below. Required 1 Required 2Required 3 What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes? Required 2