The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a moun

Question

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:

Mountain

Bikes

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.

What is the impact on net operating income by discontinuing racing bikes? (Decreases should be indicated by a minus sign.)

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:

Explanation / Answer

Current Total Total if racing bikes are dropped Difference: Net operating income increase or (decrease) Sales $       9,24,000 $ 6,68,000 $ -2,56,000 Variable manufacturing and selling expenses $       4,68,000 $ 3,17,000 $ 1,51,000 Contribution margin (loss) $       4,56,000 $ 3,51,000 $ -1,05,000 Fixed expenses: Advertising, traceable $           69,900 $ 49,300 $ 20,600 Depreciation on special equipment $           43,100 $ 43,100 $ 0   Salaries of product managers $       1,14,800 $ 78,500 $ 36,300 Common allocated costs $       1,84,800 $ 1,84,800 $ 0   Total fixed expenses $       4,12,600 $ 3,55,700 $ 56,900 Net operating income (loss) $           43,400 $ -4,700 $ -48,100

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