EXERCISE 132 Dropping or Retaining a Segment Q 10132 The Regal Cycle Company manufactures three types of bicycles-a dirt bike, a mountain bike, and a racing bike. Data Page 601 on sales and expenses for the past quarter follow: Dirt Mountain Bikes Racing Bikes Total 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 fixed expenses 60,000 18,000 30,000 12,000 Total fixed 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 long-run profitability of the various product lines