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	$ 270,000	$ 405,000	$ 257,000
Variable manufacturing and selling expenses	461,000	111,000	199,000	151,000
Contribution margin	471,000	159,000	206,000	106,000
Fixed expenses:
Advertising, traceable	69,600	8,500	40,500	20,600
Depreciation of special equipment	43,700	21,000	7,300	15,400
Salaries of product-line managers	115,100	40,200	38,200	36,700
Allocated common fixed expenses*	186,400	54,000	81,000	51,400
Total fixed expenses	414,800	123,700	167,000	124,100
Net operating income (loss)	$ 56,200	$ 35,300	$ 39,000	$ (18,100)

*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.