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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

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:

Total Dirt Bikes

Mountain

Bikes

Racing Bikes
Sales $ 926,000 $ 265,000 $ 403,000 $ 258,000
Variable manufacturing and selling expenses 478,000 118,000 210,000 150,000
Contribution margin 448,000 147,000 193,000 108,000
Fixed expenses:
Advertising, traceable 69,600 8,200 40,400 21,000
Depreciation of special equipment 43,300 20,800 7,300 15,200
Salaries of product-line managers 115,800 40,600 38,900 36,300
Allocated common fixed expenses* 185,200 53,000 80,600 51,600
Total fixed expenses 413,900 122,600 167,200 124,100
Net operating income (loss) $ 34,100 $ 24,400 $ 25,800 $ (16,100)
*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:
1a.

What is the impact on net operating income by discontinuing racing bikes? (Decreases should be indicated by a minus sign.)

1b. Should production and sale of the racing bikes be discontinued?
Yes
No

2a. Prepare a segmented income statement.

2b.

Would a segmented income statement format be more usable to management in assessing the long-run profitability of the various product lines.

Yes
No

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