EXERCISE 7-2 Dropping or Retaining a Segment [LO 7-2] 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 Bikes Mountain Bikes Total Racing Bikes $60,000 $300,000 $90,000 $150,000 120.000 180,000 27,000 63,000 60,000 90.000 33,000 27.000 30.000 10,000 14.000 6,000 23.000 6.000 9,000 8,000 Sales ... 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. 35,000 12.000 13.000 10,000 60,000 148,000 $ 32,000 18,000 46,000 $17.000 30,000 66,000 $ 24,000 12.000 36,000 $ (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. Should production and sale of the racing bikes be discontinued? Explain. Show computations to support your answer. Recast the above data in a format that would be more usable to management in assessing the long-run profitability of the various product lines. 2