The Regal Cycle Company manufactures three types of bicycles%u2014a dirt bike, a

Question

The Regal Cycle Company manufactures three types of bicycles%u2014a dirt bike, a mountain bike, and a racing bike. Data on sales and expenses for the past quarter follow:

443,000

148,000   

202,000   

93,000     

409,200  

123,000   

168,200   

118,000     

$ 33,800  

$ 25,000   

$ 33,800   

$ (25,000)    

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.

The Regal Cycle Company manufactures three types of bicycles%u2014a dirt bike, a mountain bike, and a racing bike. Data on sales and expenses for the past quarter follow:

Explanation / Answer

Hi,

Please find the answer as follows;

Part A:

Lost Contribution Margin = (93000)

Avoidable Fixed Costs = 20700 (Advertising) + 35300 ( Salaries) = 56000

Change in Net Operating Income = -93000 + 56000 = -37000

Answer is Decrease in Net Operating Income = 37000

Part B:

No

Thanks.

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