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 | $300,000 | $90,000 | $150,000 | $60,000 |
| Variable manufacturing and selling expenses | 120,000 | 27,000 | 60,000 | 33,000 |
| Contribution margin | 180,000 | 63,000 | 90,000 | 27,000 |
| Fixed expenses: | ||||
| Advertising, traceable | 30,000 | 10,000 | 14,000 | 6,000 |
| Depreciation of special equipment | 23,000 | 6,000 | 9,000 | 8,000 |
| Salaries of product-line managers | 35,000 | 12,000 | 13,000 | 10,000 |
| Allocated common fixed expenses* | 60,000 | 18,000 | 30,000 | 12,000 |
| Total fixed expenses | 148,000 | 46,000 | 66,000 | 36,000 |
| Net operating income (loss) | $32,000 | $17,000 | $24,000 | $(9,000) |
| *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:
1a. What is the impact on net operating income by discontinuing racing bikes?
1b. Should production and sale of the racing bikes be discontinued? Please indicate yes or no.
2a. Prepare a segmented income statement.
2b. Would a segmented income statement format be more usable to management in assessing the long-run profitability of the various product lines? Please indicate yes or no.