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Exercise 13-2 (Algo) Dropping or Retaining a Segment [LO13-2]

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		$	263,000		$	408,000		$	258,000
Variable manufacturing and selling expenses		472,000			113,000			200,000			159,000
Contribution margin		457,000			150,000			208,000			99,000
Fixed expenses:
Advertising, traceable		69,700			8,200			40,800			20,700
Depreciation of special equipment		44,100			20,900			7,600			15,600
Salaries of product-line managers		114,200			40,200			38,700			35,300
Allocated common fixed expenses*		185,800			52,600			81,600			51,600
Total fixed expenses		413,800			121,900			168,700			123,200
Net operating income (loss)	$	43,200		$	28,100		$	39,300		$	(24,200)

*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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