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	$	921,000		$	262,000		$	402,000		$	257,000
Variable manufacturing and selling expenses		470,000			118,000			198,000			154,000
Contribution margin		451,000			144,000			204,000			103,000
Fixed expenses:
Advertising, traceable		70,100			9,000			40,200			20,900
Depreciation of special equipment		43,800			20,500			7,900			15,400
Salaries of product-line managers		113,800			40,600			38,000			35,200
Allocated common fixed expenses*		184,200			52,400			80,400			51,400
Total fixed expenses		411,900			122,500			166,500			122,900
Net operating income (loss)	$	39,100		$	21,500		$	37,500		$	(19,900)

*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.

Totals	Dirt Bikes	Mountain Bikes	Racing Bikes
Contribution margin (loss)	0	0	0	0
Traceable fixed expenses:
Total traceable fixed expenses	0	0	0	0
Product line segment margin (loss)	0	$0	$0	$0
Net operating income (loss)	$0