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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 $ 922,000 $ 262,000 $ 407,000 $ 253,000
Variable manufacturing and selling expenses 473,000 119,000 203,000 151,000
Contribution margin 449,000 143,000 204,000 102,000
Fixed expenses:
Advertising, traceable 68,800 8,500 40,200 20,100
Depreciation of special equipment 44,000 20,200 7,900 15,900
Salaries of product-line managers 115,200 40,600 38,700 35,900
Allocated common fixed expenses* 184,400 52,400 81,400 50,600
Total fixed expenses 412,400 121,700 168,200 122,500
Net operating income (loss) $ 36,600 $ 21,300 $ 35,800 $ (20,500)
*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:
1a.

What is the impact on net operating income by discontinuing racing bikes? (Decreases should be indicated by a minus sign.)

1b. Should production and sale of the racing bikes be discontinued?
Yes
No

2a. Prepare a segmented income statement.

2b.

Would a segmented income statement format be more usable to management in assessing the long-run profitability of the various product lines.

Yes
No

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