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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 $ 931,000 $ 265,000 $ 408,000 $ 258,000
Variable manufacturing and selling expenses 477,000 114,000 210,000 153,000
Contribution margin 454,000 151,000 198,000 105,000
Fixed expenses:
Advertising, traceable 69,000 8,300 40,100 20,600
Depreciation of special equipment 44,300 21,000 7,400 15,900
Salaries of product-line managers 115,600 40,400 38,200 37,000
Allocated common fixed expenses* 186,200 53,000 81,600 51,600
Total fixed expenses 415,100 122,700 167,300 125,100
Net operating income (loss) $ 38,900 $ 28,300 $ 30,700 $ (20,100)
*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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