ision Making EXERCISE 12-2 Dropping or Retaining a Segment L012-2 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 Dirt Bikes Mountain Racing Bikes Bikes $150,000 $60,000 $300,000 $90,000 120.000 180,000 27,000 63.000 60,000 90,000 33,000 27,000 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)... 30,000 23,000 35.000 60,000 148,000 $ 32,000 10,000 6,000 12.000 18,000 46,000 $17.000 14,000 9,000 13,000 30,000 66,000 $ 24,000 16,00 8.000 10200 12.000 36.000 $ (9.000) do Not da "Allocated on the basis of sales dollars. Management is concerned about the continued losses shown by the racing bikes and wants a rec- ommendation 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 man agement in assessing the long-run profitability of the various product lines