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Exercise 11-2 Dropping or Retaining a Segment [LO11-2]

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	$	929,000		$	267,000		$	404,000		$	258,000
Variable manufacturing and selling expenses		465,000			113,000			193,000			159,000
Contribution margin		464,000			154,000			211,000			99,000
Fixed expenses:
Advertising, traceable		70,800			8,800			41,000			21,000
Depreciation of special equipment		43,200			20,300			7,800			15,100
Salaries of product-line managers		114,300			40,100			38,800			35,400
Allocated common fixed expenses*		185,800			53,400			80,800			51,600
Total fixed expenses		414,100			122,600			168,400			123,100
Net operating income (loss)	$	49,900		$	31,400		$	42,600		$	(24,100)

*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:

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 management in assessing the long-run profitability of the various product lines.

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