Question

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

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	$	930,000		$	268,000		$	410,000		$	252,000
Variable manufacturing and selling expenses		473,000			115,000			206,000			152,000
Contribution margin		457,000			153,000			204,000			100,000
Fixed expenses:
Advertising, traceable		69,400			8,900			40,300			20,200
Depreciation of special equipment		43,800			20,700			7,800			15,300
Salaries of product-line managers		114,700			40,200			38,300			36,200
Allocated common fixed expenses*		186,000			53,600			82,000			50,400
Total fixed expenses		413,900			123,400			168,400			122,100
Net operating income (loss)	$	43,100		$	29,600		$	35,600		$	(22,100)

*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.

Answer 1