EXERCISE 132 Dropping or Retaining a Segment LO132 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: Dirt Mountain Racing Total Bikes Bikes Bikes Sales ................................... $300,000 $90,000 $150,000 $ 60,000 Variable manufacturing and selling expenses ................... 120,000 27,000 60,000 33,000 Contribution margin ...................... 180,000 63,000 90,000 27,000 Fixed expenses: Advertising, traceable .................. 30,000 10,000 14,000 6,000 Depreciation of special equipment ....... 23,000 6,000 9,000 8,000 Salaries of product-line managers ........ 35,000 12,000 13,000 10,000 Allocated common xed expenses\" ...... 60,000 18,000 30,000 12,000 Total xed expenses ...................... 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. 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 longrun profitability of the various product lines