The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a moun
ID: 2454563 • Letter: T
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.)
Would a segmented income statement format be more usable to management in assessing the long-run profitability of the various product lines.
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
1a.
No production and sale of the racing bikes should not be discontinued. If the racing bikes were discontinued, then the net oparating income for the company as a whole would decrease by $ (31,200) each quarter.
CURRENT TOTAL IF RACING DIFFERENCE NET
TOTAL BIKES ARE DROPPED OPERATING INCOME OR (DECREASE)
Sale $ 9,28,000 $ 6,72,000 $ (2,56,000)
Variable expenses $ 4,68,000 $ 3,16,000 $ 1,52,000
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Contribution margin $ 4,60,000 $ 3,56,000 (104,000)
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Fixed expenses:
Advertising, Traceable 69,000 48,600 20,900
Depreciation on special equipment 44,000 44,000
Salaries of product managers 1,14,000 79,000 35,900
Common allocated costs 1,85,600 1,85,600 0
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Total Fixed Expenses 4,14,000 3,62,100 72,800
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Net Operating income $ 46,000 $ (6,100) $ (31,200)
The depreciation of a special equipment is a sunk cost and is not relevant to the decision. The common costs are allocated and will continue regardless of whether or not the racing bikes are discontined; thus they are not relevant to the decision.
1b.
(NO)
No production and sale of the racing bikes should not be discontinued. If the racing bikes were discontinued, then the net operating income for the company as a whole would decrease.
2a.
Segmented Income Statement :
TOTAL DIRT MOUNTAIN RACING
BIKES BIKES BIKES
Sales $ 9,28,000 $ 2,66,000 $ 4,06,000 $ 2,56,000
Variable Manufacturing and $ 4,68,000 $ 1,16,000 $ 2,00,000 $ 1,52,000
selling expenses
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Contribution margin $ 4,60,000 $ 1,50,000 $ 2,06,000 $ 1,04,000
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Fixed expenses:
Advertising 69,500 8,300 40,300 20,900
Deperecation of special equipment 44,000 20,000 7,900 16,000
Salaries of the product line managers 1,14,900 40,700 38,300 35,900
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Total Traceable fixed expenses 2,28,400 69,100 86,500 72,800
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Product line segment margin 2,31,600 80,900 1,19,500 31,200
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Common fixed expenses 1,85,000
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Net Operating Income 46,000
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2b.
(YES)
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