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 mountains bike, and a racing bike. Data on sales and expenses for the past quarter follow: Dirt Tatal s 300,00090,00o 150000 60,000 s 60.000 33,000 Variable manufacturing and selling expenses 120,000 27 000 Fixed expenses Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses 30,000 23,000 35000 60,000 10.000 6.000 12.000 18,000 14,000 9000 13,000 30,000 6,000 8,000 10,000 12,000 Total fxed expenses Net operating income (oss) *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.) Net Total lf Racing Current TotalBikes Are Dropped Operating Increase or ariable manufacturing and selling expenses Contribution margin (loss) Fixed expenses 60000 $ 33.000 27000 33.000 33.000 Advertising, traceable Salaries of product managers Depreciation on special equipment Common allocated costs Total fixed expenses Net operating income (loss) 1b. Should production and sale of the racing bikes be discontinued? Yes O No 2a. Prepare a segmented income statement Contribution margin (loss) Traceable fixed expenses Total traceable fixed expenses Net operating income (loss)

Explanation / Answer

a) Current Total Total If Racing Bikes Are Dropped Difference: Net Operating Income Increase or (Decrease Sales $300,000 $240,000 -$60,000 Variable manufacturing and selling expenses $120,000 $87,000 $33,000 Contribution margin $180,000 $153,000 -$27,000 Fixed expenses: Advertising, traceable $30,000 $24,000 $6,000 Depreciation of special equipment $23,000 $23,000 0 Salaries of product-line managers $35,000 $25,000 $10,000 Allocated common fixed expenses* $60,000 $60,000 0 Total fixed expenses $148,000 $132,000 $16,000 Net operating income (loss) $32,000 $21,000 -$11,000 b)No, it should not be discontinued. 2) Total Dirt Bikes 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 Traceable 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 Total traceable fixed expenses $88,000 $28,000 $36,000 $24,000 Product line segment margin $92,000 $35,000 $54,000 $3,000 Common fixed expenses $60,000 Net operating income (loss) $32,000 b) Yes,a segmented income statement format would be more usable to management in assessing the long-run profitability of the various product lines.

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