Exercise 2 Dropping or Retaining a Segment 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 Total Bikes Sales $ 925 000 $287 000 $ 400.000 S 255.000 Variable manufacturing and selling expenses 473,000 118,000 203,000 152.000 Contribution margin 452.000 149.000 200,000 103.000 Fixed expenses Advertising traceable 69,500 8.600 40.500 20,400 Depreciation of special equipment 43.700 20.400 7.800 15,500 Salaries of product line managers 115.500 40.500 400 A 800 Allocated common fixed expenses 185.000 53.00 80.000 51 000 Total foued expenses 413.700 122.900 167 300 1235500 Net operating income (loss) 38,300 $ 26,100 $ 32,700 $ (20.500) "Allocated on the basis of sales dollars Management is concerned about the continued losses shown by the racing bikes and wants 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 contribution margin lost if the production and sale of racing bikes are discontinued? 2 is the advertising (traceable expense relevant in the decision-making in other words, is the advertising traceable) expenses avoidable if the production and sale of racing bikes are discontinued? 3 is the depreciation of special equipment relevant in the decision-making? In other words, is the depreciation of special equipment avoidable if the production and sale of racing bikes are discontinued? 4 is allocated common fued expenses relevant in the decision-making in other words, is the allocated common fixed expenses avoidable if the production and sale of racing bikes are discontinued? 5. What are the fixed costs avoided if the production and sale of racing bikes are discontinued? 6. What is the effect on operating income per quarter if the company discontinues the Racing Bikes? please use minus sign before the number if there is a decrease in operating income) 7. Should the production and sale of racing bikes be discontinued