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: Total Bikes Dirt Mountain Racing Bikes Bikes Sales Variable manufacturing and selling expenses $300,000 $90,000 $150,000 $60,000 120,000 27,000 60.000 33,000 180.000 63.000 90,000 27.000 Contribution margin Fixed expenses: Advertising, traceable 30,000 10,000 14,000 6,000 Depreciation of special equipment Salaries of product-line managers 23.000 35,000 6.000 9.000 8,000 12,000 13,000 10,000 Allocated common fixed expenses" Total fixed expenses 60,000 18,000 30,000 12.000 148,000 46.000 66.000 36,000 Net operating income (loss) $ 32,000 $17,000 $ 24.000 $ (9.000) "Allocated on the basis of sales dollars Page 601 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.