Exercise 11-2 (Algo) 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 andexpenses for the past quarter follow:SalesVariable manufacturing and selling expensesContribution marginFixed expenses:Advertising, traceableDepreciation of special equipmentSalaries of product-line managersAllocated common fixed expenses*Total fixed expensesNet operating income (loss)*Allocated on the basis of sales dollars.Total$ 923,000483,000440,00069,30043,300Required 1114,400184,600411,600$ 28,400Required 2 Required 3Dirt Bikes$ 264,000119,000145,0008,50020, 20040,50052,800122,000$ 23,000Complete this question by entering your answers in the tabs below.MountainBikes$ 403,000204,000199,000Management is concerned about the continued losses shown by the racing bikes and wants a recommendation as to whether or notthe 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-runprofitability of the various product lines.Racing Bikes$ 256,000160,00096,00040,70020,1007,40015,70038,90035,00080,60051, 200122,000167,600$ 31,400 $ (26,000)What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?

The cost that is relevant for decision making is called relevant cost. The given question is based on the relevant costs of continuing or discontinuing decisions. In this decision, a company must and should choose whether the net financial advantage or benefit is more than the discontinuing the specified department. The relevant cost to be taken into account must be avoidable when the alternative option is selected. A segment report is a report on an organization's financial data. This is relevant to every part of the organization. Investors can make recommendations using this financial information.Analysis and Calculation:Answer (1) : Calculation of the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes.Financial Disadvantage:Contribution Margin Lost $96,000Less: Decrease in ExpensesAdvertising, traceable($20,100)Salaries of product-line managers($35,000)Total Net Contribution Margin decreased$40,900Therefore, there is a financial disadvantage of $40,900 per quarter of discontinuing the Racing Bikes.Answer (2) :No.. Since there is a financial disadvantage of $40,900 per quarter of discontinuing the Racing Bikes. Therefore, the production and sale of racing bikes should not be discontinued.Answer (3) :Prepare a properly formatted segmented income statement :Total, ($)Dirt Bikes, ($)Mountain Bikes, ($)Racing Bikes, ($)Sales923,000264,000403,000256,000Less: Variable manufacturing and selling expenses483,000119,000204,000160,000Contribution margin440,000145,000199,00096,000Less: Fixed expenses:Advertising, traceable (a)69,3008,50040,70020,100Depreciation of special equipment (b)43,30020,2007,40015,700Salaries of product-line managers (c)114,40040,50038,90035,000Total traceable fixed expenses (d = a + b + c)227,00069,20087,00070,800Product line Segment Margin (loss)213,00075,800112,00025,200Less: Allocated common fixed expenses*184,60052,80080,60051,200Net operating income (loss)28,40023,00031,400(26,000)Answer (1) : Calculation of the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes.Financial Disadvantage:Contribution Margin Lost $96,000Less: Decrease in ExpensesAdvertising, traceable($20,100)Salaries of product-line managers($35,000)Total Net Contribution Margin decrease$40,900Therefore, there is a financial disadvantage of $40,900 per quarter of discontinuing the Racing Bikes.Answer (2) :No.. Since there is a financial disadvantage of $40,900 per quarter of discontinuing the Racing Bikes. Therefore, the production and sale of racing bikes should not be discontinued.Answer (3) :Prepare a properly formatted segmented income statementTotal, ($)Dirt Bikes, ($)Mountain Bikes, ($)Racing Bikes, ($)Sales923,000264,000403,000256,000Less: Variable manufacturing and selling expenses483,000119,000204,000160,000Contribution margin440,000145,000199,00096,000Less: Fixed expenses:Advertising, traceable (a)69,3008,50040,70020,100Depreciation of special equipment (b)43,30020,2007,40015,700Salaries of product-line managers (c)114,40040,50038,90035,000Total traceable fixed expenses (d = a + b + c)227,00069,20087,00070,800Product line Segment Margin (loss)213,00075,800112,00025,200Less: Allocated common fixed expenses*184,60052,80080,60051,200Net operating income (loss)28,40023,00031,400(26,000)