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