Exercise 13-2 (Algo) Dropping or Retaining a Segment [LO13-2] 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 $ 932,000 $ 264,000 $ 409,000 $ 259,000

Variable manufacturing and selling expenses 479,000 116,000 203,000 160,000

Contribution margin 453,000 148,000 206,000 99,000

Fixed expenses: Advertising, traceable 69,100 8,200 40,400 20,500

Depreciation of special equipment 43,500 20,600 7,800 15,100

Salaries of product-line managers 115,800 40,800 38,900 36,100

Allocated common fixed expenses* 186,400 52,800 81,800 51,800 Total fixed expenses 414,800 122,400 168,900 123,500

Net operating income (loss) $ 38,200 $ 25,600 $ 37,100 $ (24,500) *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.