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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 $ 268,000 $ 406,000 $ 252,000
Variable manufacturing and selling expenses 473,000 115,000 200,000 158,000
Contribution margin 453,000 153,000 206,000 94,000
Fixed expenses:
Advertising, traceable 69,700 8,400 40,400 20,900
Depreciation of special equipment 42,700 20,100 7,300 15,300
Salaries of product-line managers 116,200 40,800 38,900 36,500
Allocated common fixed expenses* 185,200 53,600 81,200 50,400
Total fixed expenses 413,800 122,900 167,800 123,100

Net operating income (loss) $ 39,200 $ 30,100 $ 38,200 $ (29,100)

*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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