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.

Total Dirt
Bikes

Mountain

Bikes

Racing
Bikes   Sales $ 926,000 $ 262,000 $ 405,000   $ 259,000     Variable manufacturing and selling expenses 485,000 120,000 206,000   159,000     Contribution margin 441,000 142,000 199,000 100,000     Fixed expenses:     Advertising, traceable 68,900 8,300 40,200 20,400     Depreciation of special equipment 43,100 20,100 7,500 15,500       Salaries of product-line managers 114,200 40,100 38,300 35,800       Allocated common fixed expenses* 185,200 52,400 81,000 51,800     Total fixed expenses 411,400 120,900 167,000 123,500     Net operating income (loss) $ 29,600 $ 21,100   $ 32,000 $ (23,500)

Explanation / Answer

SOLUTION

1A.

1B. No, production and sale of the racing bikes should not be discontinued.

2A.

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

Current Total ($) Total if racing bikes are dropped ($) Difference: Net Operating Income Increase or (Decrease) ($) Sales 926,000 667,000 (259,000) Variable manufacturing and selling expenses (485,000) 326,000 159,000 Contribution margin (loss) 441,000 341,000 (100,000) Fixed expenses:   Advertising, traceable 68,900 48,500 20,400   Depreciation on special equipment 43,100 43,100 0   Salaries of product managers 114,200 78,400 35,800   Common allocated costs 185,200 185,200 0 Total fixed expenses 411,400 355,200 56,200 Net operating income (loss) 29,600 (14,200) (43,800)

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