Exercise 10-2 Dropping or Retaining a Segment [LO10-2] The Regal Cycle Company m
ID: 2524279 • Letter: E
Question
Exercise 10-2 Dropping or Retaining a Segment [LO10-2]
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.)
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Should production and sale of the racing bikes be discontinued?
yes or no?
Prepare a segmented income statement.
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Would a segmented income statement format be more usable to management in assessing the long-run profitability of the various product lines.
yes or no?
Explanation / Answer
1a Current Total Total If Racing Bikes Are Dropped Difference: NetOperatingIncome Sales 928000 669000 -259000 Variable manufacturing and selling expenses 468000 312000 156000 Contribution margin (loss) 460000 357000 -103000 Fixed expenses: Advertising, traceable 69900 49400 20500 Depreciation on special equipment 43900 43900 0 Salaries of product manager 115900 79000 36900 Common allocated costs 185600 183800 1800 Total fixed expenses 415300 356100 59200 Net operating income (loss) 44700 900 -43800 1b No 2a Total Dirt Bikes Mountain Bikes Racing Bikes Sales 928000 262000 407000 259000 Variable manufacturing and selling expenses 468000 119000 193000 156000 Contribution margin (loss) 460000 143000 214000 103000 Traceable fixed expenses: Advertising, traceable 69900 8500 40900 20500 Depreciation on special equipment 43900 20500 7800 15600 Salaries of product manager 115900 40500 38500 36900 Total traceable fixed expenses 229700 69500 87200 73000 Product line segment margin 230300 73500 126800 30000 Common fixed expenses 185600 Net operating income (loss) 44700 2b Yes
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