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	$	926,000		$	265,000		$	406,000		$	255,000
Variable manufacturing and selling expenses		476,000			112,000			204,000			160,000
Contribution margin		450,000			153,000			202,000			95,000
Fixed expenses:
Advertising, traceable		70,600			9,000			40,800			20,800
Depreciation of special equipment		44,000			20,400			7,800			15,800
Salaries of product-line managers		115,700			40,400			38,400			36,900
Allocated common fixed expenses*		185,200			53,000			81,200			51,000
Total fixed expenses		415,500			122,800			168,200			124,500
Net operating income (loss)	$	34,500		$	30,200		$	33,800		$	(29,500)

*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