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.)

Prepare a segmented income statement.

Contribution margin (loss)

Total Dirt
Bikes

Mountain

Bikes

Racing
Bikes   Sales $ 918,000 $ 263,000 $ 403,000   $ 252,000     Variable manufacturing and selling expenses 477,000 114,000 204,000   159,000     Contribution margin 441,000 149,000 199,000 93,000     Fixed expenses:     Advertising, traceable 70,400 8,700 40,900 20,800     Depreciation of special equipment 43,100 20,400 7,400 15,300       Salaries of product-line managers 114,000 40,700 38,100 35,200       Allocated common fixed expenses* 183,600 52,600 80,600 50,400     Total fixed expenses 411,100 122,400 167,000 121,700     Net operating income (loss) $ 29,900 $ 26,600   $ 32,000 $ (28,700)

Explanation / Answer

Assumption: In the given question details of the sales and other expenses were not posted, however based on the the similar/ same question available with us, the above answer is done.

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