The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a moun
ID: 2563565 • Letter: T
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:
*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.)
2a. Prepare a segmented income statement.
Total DirtBikes Mountain Bikes Racing
Bikes Sales $ 300,000 $ 90,000 $ 150,000 $ 60,000 Variable manufacturing and selling expenses 120,000 27,000 60,000 33,000 Contribution margin 180,000 63,000 90,000 27,000 Fixed expenses: Advertising, traceable 30,000 10,000 14,000 6,000 Depreciation of special equipment 23,000 6,000 9,000 8,000 Salaries of product-line managers 35,000 12,000 13,000 10,000 Allocated common fixed expenses* 60,000 18,000 30,000 12,000 Total fixed expenses 148,000 46,000 66,000 36,000 Net operating income (loss) $ 32,000 $ 17,000 $ 24,000 $ (9,000 )
Explanation / Answer
Total Total without racing bikes Net income change Sales 300000 240000 -60000 Variable manufacturing and selling expenses 120000 87000 33000 Contribution margin 180000 153000 -27000 Fixed expenses: Advertising, traceable 30000 24000 6000 Depreciation of special equipment 23000 23000 0 Salaries of product-line managers 35000 25000 10000 Allocated common fixed expenses 60000 60000 0 Total fixed expenses 148000 132000 16000 Net operating income (loss) 32000 21000 -11000 2a Total Dirt bikes Mountain Bikes Racing bikes Sales 300000 90000 150000 60000 Variable manufacturing and selling expenses 120000 27000 60000 33000 Contribution margin 180000 63000 90000 27000 Traceable fixed expenses: Advertising, traceable 30000 10000 14000 6000 Depreciation of special equipment 23000 6000 9000 8000 Salaries of product-line managers 35000 12000 13000 10000 Total traceable fixed expenses 88000 28000 36000 24000 Segment margin 92000 35000 54000 3000 Allocated common fixed expenses 60000 Net operating income (loss) 32000
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