Question

Exercise 12-2 Dropping or Retaining a Segment [LO12-2]

The Regal Cycle Company manufactures three types of bicycles—a 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	$	932,000		$	269,000		$	404,000		$	259,000
Variable manufacturing and selling expenses		471,000			113,000			202,000			156,000
Contribution margin		461,000			156,000			202,000			103,000
Fixed expenses:
Advertising, traceable		69,500			8,600			40,600			20,300
Depreciation of special equipment		43,800			20,900			7,500			15,400
Salaries of product-line managers		115,000			41,000			38,500			35,500
Allocated common fixed expenses*		186,400			53,800			80,800			51,800
Total fixed expenses		414,700			124,300			167,400			123,000
Net operating income (loss)	$	46,300		$	31,700		$	34,600		$	(20,000)

*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.