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.)

       

  

        

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) impact on net operating income by discontinuing racing bikes = 104000-20300-36500 = $47200

Net operating income will reduce by $47200 by discontinuing racing bikes.

1b) Production and sale of racing bikes should not be discontinued.

2a) Segmented income statement

Mountain

Bikes

2b) Yes, a segmented income statement format would be more usable to management in assessing the long-run profitability of the various product lines.

Total Dirt
Bikes

Mountain

Bikes

Racing
Bikes   Sales $ 922,000 $ 267,000 $ 400,000   $ 255,000     Variable manufacturing and selling expenses 466,000 116,000 199,000   151,000     Contribution margin 456,000 151,000 201,000 104,000     Fixed expenses:     Advertising, traceable 68,500 8,100 40,100 20,300     Depreciation of special equipment 43,600           Salaries of product-line managers 114,700 40,200 38,000 36,500       Allocated common fixed expenses 184,400            Total fixed expenses 411,200 48300   78100   56800   Net operating income (loss) $ 44,800 $ 102700   $ 122900   $ 47200

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