EXERCISE 13-2 Dropping or Retaining a Segment L013-2 The Regal Cycle Company manufactures three types of bicycles-a dirt bike, a mountain bike, and a racing bike. Data on sales and expenses for the past quarter follow: Dirt Mountain Racing Bikes Bikes Bikes Total Sales $300,000 $90,000 $150,000 $60,000 27,000 60,000 33,000 120,000 180,000 63.000 90,000 27,000 Variable manufacturing and selling expenses Contribution margin Fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses 30,000 10,000 14,000 6.000 23,000 6,000 9.000 8.000 35,000 12,000 13,000 10,000 60,000 18,000 30,000 12.000 Total fixed expenses 148,000 46,000 66,000 36,000 $ 32,000 $ 17,000 $ 24,000 $ (9,000) Net operating income (loss) * Allocated on the basis of sales dollars. Sales $300,000 $90.000 $150,000 $60,000 120,000 33.000 27.000 60.000 63.000 90.000 180,000 27,000 30,000 10,000 14,000 6.000 Variable manufacturing and selling expenses Contribution margin Fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses Total fixed expenses Net operating income (loss) *Allocated on the basis of sales dollars 23,000 6,000 9,000 8,000 35,000 12,000 13,000 10.000 60,000 18,000 30.000 12,000 148.000 46,000 66.000 36,000 $ 32,000 $ 17,000 $ 24,000 $(9.000) 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