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: Dirt Mountain Racing Bikes Bikes Bikes Total $919,000 $264,000 $402.000 $253,000 Sales Variable manufacturing and selling expenses 479,000 1,000 209,000 151,000 Contribution margin Fixed expenses: 440,000 145,000 193,000 102.000 40,400 7,800 38,200 00 69,500 8,200 Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* 43,800 20,700 115,300 183,800 20,900 15,300 36,500 50,600 40,600 52,800 36 80.4 Total fixed expenses 412.400 22,300 166,800 123,300 Net operating income (loss) $ 27,600 22,700 26,200 (21,300) 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: a. What is the impact on net operating income by discontinuing racing bikes? (Decreases should be indicated by a minus sign.) Total If Racing Bikes Are Dropped Operating Income Increase or (Decrease) Current Total Contribution margin (loss) Fixed expenses: Total fixed Net operating income (loss)

Explanation / Answer

1a Current Total Total If Racing Bikes Are Dropped Difference: NetOperatingIncome Sales 919000 666000 -253000 Variable manufacturing and selling expenses 479000 328000 151000 Contribution margin (loss) 440000 338000 -102000 Fixed expenses: Advertising, traceable 69500 48600 20900 Depreciation on special equipment 43800 43800 0 Salaries of product manager 115300 78800 36500 Common allocated costs 183800 183800 0 Total fixed expenses 412400 355000 57400 Net operating income (loss) 27600 -17000 -44600 1b No 2a Total Dirt Bikes Mountain Bikes Racing Bikes Sales 919000 264000 402000 253000 Variable manufacturing and selling expenses 479000 119000 209000 151000 Contribution margin (loss) 440000 145000 193000 102000 Traceable fixed expenses: Advertising, traceable 69500 8200 40400 20900 Depreciation on special equipment 43800 20700 7800 15300 Salaries of product manager 115300 40600 38200 36500 Total traceable fixed expenses 228600 69500 86400 72700 Product line segment margin 211400 75500 106600 29300 Common fixed expenses 183800 Net operating income (loss) 27600

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