value: 5.00 points The Regal Cycle Company manufactures three types of bicycles-

Question

value: 5.00 points 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 Dirt Bikes Mountain Racing Bikes $ 928,000 267,000 $ 404,000 S 257,000 468,000 116,000 197,000 155,000 Total es Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses 460,000 51,000 207,000 102,000 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses 69,800 43,300 113,600 185,600 8,600 20,400 40,100 53,400 40,300 7,700 38,200 80,800 20,900 15,200 35,300 51,400 Total fixed expenses 412,300 122,500 167,000 122,800 Net operating income (loss) S 47,700 $ 28,500 40,000 $ (20,800) 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? (Decreases should be indicated by a minus sign.)

Explanation / Answer

1.a What is the impact on net operating income by discontinuing racing bikes Current Total Total If Racing Bikes Are Dropped Difference: Net Operating Income Increase or (Decrease) Sales $       928,000 $     671,000 $         (257,000) Variable Manufacturing Overhead $       468,000 $     313,000 $           155,000 Contribution $       460,000 $     358,000 $         (102,000) Fixed Expense Advertising Traceable $         69,800 $        48,900 $             20,900 Depreciation on special equipment $         43,300 $        43,300 $                       -   Salary of product managers $       113,600 $        78,300 $             35,300 Common allocated cost $       185,600 $     185,600 $                       -   Total Fixed Expense $       412,300 $     356,100 $             56,200 Net Operating Income $         47,700 $          1,900 $         (158,200) 1 b. The compay should not discontinue the racing bikes, as it would reduce th enet income of the company to $1900 2a. Prepare a segmented income statement Total Dirt Bikes Mountain Bikes Racing Bikes Sales $       928,000 $     267,000 404000 257000 Variable Manufacturing Overhead $       468,000 $     116,000 197000 155000 Contribution $       460,000 $     151,000 $           207,000 $   102,000 Fixed Expense Advertising Traceable $         69,800 $          8,600 $             40,300 $     20,900 Depreciation on special equipment $         43,300 $        20,400 $                7,700 $     15,200 Salary of product managers $       113,600 $        40,100 $             38,200 $     35,300 Total Traceable Fixed Expense $       226,700 $        69,100 $             86,200 $     71,400 Product Line segment Margin $       233,300 $        81,900 $           120,800 $     30,600 Common fixed expenses $       185,600 Net Operating Income $         47,700 2b. Yes, a segmented income statement format be more usable to management in assessing the long­run profitability of the various product line

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