EXERCISE 13-2 Dropping or Retaining a Segment LO13-2

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:

Sales

Variable manufacturing

and selling expenses

Contribution margin

Fixed expenses:

Advertising, traceable

Depreciation of special equipment

Salaries of product-line managers

Allocated common fixed expenses

Total fixed expenses

Net operating income (loss)

Allocated on the basis of sales dollars.

*

Dirt

Bikes

Total

$300,000 $90,000 $150,000

Mountain Racing

Bikes

Bikes

$60,000

120,000 27,000

180,000 63,000

60,000 33,000

90,000

27,000

30,000 10,000

14,000

6,000

23,000

6,000

9,000

8,000

35,000 12,000

13,000

10,000

60,000 18,000

30,000 12,000

148,000 46,000 66,000 36,000

$32,000 $17,000 $24,000 $ (9,000)

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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.