These are the options for the 2a. The Regal Cycle Company manufactures three typ

Question

These are the options for the 2a.

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 Total 481,000 450,000 Bikes 119,000 150,000 Bikes 206,000 197,000 Bikes 156,000 103,000 $931,000 $ 269,000 $ 403,000 $ 259,000 Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* 69,500 44,500 114,800 186,200 8,700 20,900 40,600 53,800 40,100 7,800 38,900 80,600 20,700 15,800 35,300 51,800 Total fixed expenses 415,000 124,000 167,400 123,600 Net operating income (loss) $ 35,000 $ 26,000 $ 29,600 $ (20,600) 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.)

Explanation / Answer

1a Current Total Total If Racing Bikes Are Dropped Difference: NetOperatingIncome Sales 931000 672000 -259000 Variable manufacturing and selling expenses 481000 325000 156000 Contribution margin (loss) 450000 347000 -103000 Fixed expenses: Advertising, traceable 69500 48800 20700 Depreciation on special equipment 44500 44500 0 Salaries of product manager 114800 79500 35300 Common allocated costs 186200 186200 0 Total fixed expenses 415000 359000 56000 Net operating income (loss) 35000 -12000 -47000 1b No 2a Total Dirt Bikes Mountain Bikes Racing Bikes Sales 931000 269000 403000 259000 Variable manufacturing and selling expenses 481000 119000 206000 156000 Contribution margin (loss) 450000 150000 197000 103000 Traceable fixed expenses: Advertising, traceable 69500 8700 40100 20700 Depreciation on special equipment 44500 20900 7800 15800 Salaries of product manager 114800 40600 38900 35300 Total traceable fixed expenses 228800 70200 86800 71800 Product line segment margin 221200 79800 110200 31200 Common fixed expenses 186200 Net operating income (loss) 35000 2b Yes

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