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		$	267,000		$	408,000		$	257,000
Variable manufacturing and selling expenses		464,000			112,000			193,000			159,000
Contribution margin		468,000			155,000			215,000			98,000
Fixed expenses:
Advertising, traceable		69,600			8,500			40,800			20,300
Depreciation of special equipment		43,100			20,600			7,100			15,400
Salaries of product-line managers		114,700			40,100			38,600			36,000
Allocated common fixed expenses*		186,400			53,400			81,600			51,400
Total fixed expenses		413,800			122,600			168,100			123,100
Net operating income (loss)	$	54,200		$	32,400		$	46,900		$	(25,100)

*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.