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: Total Dirt Bikes Mountain Bikes Racing Bikes

Sales $ 926,000 $ 267,000 $ 406,000 $ 253,000

Variable manufacturing and selling expenses 463,000 111,000 194,000 158,000

Contribution margin 463,000 156,000 212,000 95,000

Fixed expenses:

Advertising, traceable 70,400 8,800 41,000 20,600

Depreciation of special equipment 43,900 21,000 7,100 15,800

Salaries of product-line managers 114,600 40,300 38,500 35,800

Allocated common fixed expenses* 185,200 53,400 81,200 50,600

Total fixed expenses 414,100 123,500 167,800 122,800

Net operating income (loss) $ 48,900 $ 32,500 $ 44,200 $ (27,800)

*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.)

1b. Should production and sale of the racing bikes be discontinued? Yes No 2a. Prepare a segmented income statement.

Explanation / Answer

Ans 2a. Segment Income Statement

Total Income

Dirt Bikes 32500

Mountain Bikes 44200

Racing Bikes -27800

Net Income $48900

1 a. Impact on net operating income by discontinuing racing bikes:

This will bring the company in loss as the fixed expenses will be allocated to the remaining segment which will consume the profits of other 2 segments as well.

1b. No

Particulars Total Dirt Bikes Mountain Bikes Racing Bikes Sales 926000 267000 406000 253000 Var Mfg & Sell exp -463000 -111000 -194000 -158000 Contribution 463000 156000 212000 95000 Advertising -70400 -8800 -41000 -20600 Depreciation -43900 -21000 -7100 -15800 Salaries -114600 -40300 -38500 -35800 Allocated FC -185200 -53400 -81200 -50600 Net operating Income 48900 32500 44200 -27800

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