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|
|Variable manufacturing and selling expenses||120,000||27,000||60,000||33,000|
|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.
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.