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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 $ 928,000 $ 265,000 $ 409,000 $ 254,000 Variable manufacturing and selling expenses 478,000 120,000 208,000 150,000 Contribution margin 450,000 145,000 201,000 104,000 Fixed expenses: Advertising, traceable 70,200 8,800 40,800 20,600 Depreciation of special equipment 43,500 20,500 7,600 15,400 Salaries of product-line managers 115,000 40,200 38,000 36,800 Allocated common fixed expenses* 185,600 53,000 81,800 50,800 Total fixed expenses 414,300 122,500 168,200 123,600 Net operating income (loss) $ 35,700 $ 22,500 $ 32,800 $ (19,600) *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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