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 920,000 $ 264,000 400,000 $ 256,000 466,000 111,000 198,000 157,000 Total Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses 454,000 53,000 202,000 99,000 40,400 7,400 38,800 80,000 68,800 44,000 8,100 20,800 40,800 52,800 20,300 15,800 35,200 51,200 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* 114,800 184,000 Total fixed expenses 411,600 ,500 166,600 22,500 Net operating income (loss) S 42,400 30,500 $ 35,400 (23,500) 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.

Explanation / Answer

1a.

1b. NO

2a.

2b. Yes

Current Total Total if Racing Bikes are Dropped Difference :Net Operating income increase or (decrease) Sales 920000 664000 -256000 Variable expenses 466000 309000 -157000 Contribution margin (loss) 454000 355000 -99000 Fixed expenses Advertising, traceable 68800 48500 -20300 Depreciation on special equipment 44000 44000 Salaries of product managers 114800 79600 -35200 common allocated costs 184000 184000 Total fixed expenses 411600 356100 55500 Net operating income (loss) 42400 -1100 -43500

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