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	$	923,000		$	268,000		$	404,000		$	251,000
Variable manufacturing and selling expenses		475,000			112,000			207,000			156,000
Contribution margin		448,000			156,000			197,000			95,000
Fixed expenses:
Advertising, traceable		70,300			8,900			40,700			20,700
Depreciation of special equipment		43,400			20,600			7,200			15,600
Salaries of product-line managers		115,800			40,600			38,900			36,300
Allocated common fixed expenses*		184,600			53,600			80,800			50,200
Total fixed expenses		414,100			123,700			167,600			122,800
Net operating income (loss)	$	33,900		$	32,300		$	29,400		$	(27,800)

*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