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.)

Yes

No

Would a segmented income statement format be more usable to management in assessing the long-run profitability of the various product lines.

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:

Explanation / Answer

1-a) Decrease in overall income of $34200 $ Contribution margin of Racing bikes 106000 (-) Avoidable fixed expenses Advertising, traceable 20200 Depreciation of special equipment 15800 Salaries of product-line managers 35800 Total avoidable fixed expenses 71800 Decrese in overall operating income 34200 1-b) No, Since it decreases in overall income by $34200 2-a) Total Dirt Mountain Bikes Bikes   Sales 669000                   2,67,000.00                    4,02,000.00   Variable manufacturing and selling expenses 317000                   1,12,000.00                    2,05,000.00   Contribution margin 352000                   1,55,000.00                    1,97,000.00   Fixed expenses:     Advertising, traceable 49100                         8,400.00                        40,700.00     Depreciation of special equipment 27900                       20,600.00                          7,300.00     Salaries of product-line managers 79500                       40,900.00                        38,600.00     Allocated common fixed expenses* 185600                       74,073.54                    1,11,526.46 (185600*267000/(267000+402000)) (185600*(402000/(267000+402000)))   Total fixed expenses 342100                   1,43,973.54                    1,98,126.46   Net operating income (loss) 9900                       11,026.46                         -1,126.46 2-b) yes. The segmented income statement format be more usable to management in assessing the long-run profitability of the various product lines

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