The Regal Cycle Company manufactures three types of bicycles -a dirt bike, a mou

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 Bikes Racing Bikes Total Mountain Bikes Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses: $ 90,000 $60,000 $ 300,000 120,000 180,000 27,000 63,000 150,000 60,000 90,000 33,000 27,000 14,000 9,000 13,000 30,000 66,000 S 24,000 Advertising, traceable 30,000 23,000 35,000 60,000 148,000 $32,000 10,000 6,000 12,000 18,000 46,000 6,000 8,000 10,000 12,000 36,000 (9,000 Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses Total fixed expenses S 17,000 Net operating income (loss) 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.

2a.

Current Total Total If Racing Bikes Are Dropped Difference: Net Operating Income Increase or (Decrease) Sales 300000 240000 -60000 Variable manufacturing and selling expenses 120000 87000 33000 Contribution margin (loss) 180000 153000 -27000 Fixed expenses: Advertising, traceable 30000 24000 6000 Depreciation on special equipment 23000 23000 0 Salaries of product managers 35000 25000 10000 Allocated common fixed expenses 60000 60000 0 Total fixed expenses 148000 132000 16000 Net operating income (loss) 32000 21000 -11000

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