Question

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T hey l Decision Making EXERCISE 12-pro Dropping or Retaining a Segment L012-2 Company manufactures three types of bicycles- a dirt bike, a mountain bike, and ata on sales and expenses for the past quarter follow: S eycle Com racing bike. Data on s: Total Racing Dirt Bikes $90,000 Mountain Bikes $150,000 Bikes $300,000 $60,000 120,000 180,000 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 6,000 8,000 10,000 12,000 36,000 $ (9.000) "Allocated on the basis of sales dollars. Management is concerned about the continued losses shown by the racing bikes and wants a rec- mmendation 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: 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.