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	$ 928,000	$ 265,000	$ 405,000	$ 258,000
Variable manufacturing and selling expenses	468,000	117,000	192,000	159,000
Contribution margin	460,000	148,000	213,000	99,000
Fixed expenses:
Advertising, traceable	68,900	8,200	40,600	20,100
Depreciation of special equipment	43,200	20,500	7,100	15,600
Salaries of product-line managers	115,100	40,100	38,600	36,400
Allocated common fixed expenses*	185,600	53,000	81,000	51,600
Total fixed expenses	412,800	121,800	167,300	123,700
Net operating income (loss)	$ 47,200	$ 26,200	$ 45,700	$ (24,700)

*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.