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 Dirt Mountain Racing Total Bikes Bikes $ 926,000 s269,000 478,000 111,000 Bikes $402,000 $255,000 209,000 158,000 Sales Variable manufacturing and selling expenses Contribution margin 448,000 158,000 97,000 Fixed expenses 69,600 9,000 40,400 20,200 7,200 15,700 115,600 40,90038,70036,000 185,200 53,800 80,400 51,000 Advertising, traceable Depreciation of special Salaries of product-line Allocated common fixed 43,300 20,400 equipment managers expenses* Total fixed expenses 413,700 124,100 166,700 122,900 Net operating income (loss) $ 34,300 $33,900 $ 26,300 $ (25,900) 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

Answer 1-a. Current Total Total if Racing Bikes Are Dropped Diference: Net Operating Income Inc. or (Dec.) Sales                 926,000                  671,000                      (255,000) Variable Manufacturing & Selling Expenses                 478,000                  320,000                        158,000 Contribution Margin                 448,000                  351,000                        (97,000) Fixed Expenses Advertsing                   69,600                    49,400                           20,200 Depreciation of Special Equipment                   43,300                    43,300                                    -   Salaries of Product-Line Managers                 115,600                    79,600                           36,000 Allocated Common Fixed Expenses                 185,200                  185,200                                    -   Total Fixed Expenses                 413,700                  357,500                           56,200 Net Operating Income (Loss)                   34,300                    (6,500)                        (40,800) Answer 1-b. No If the company drops the Racing Bikes, it will reduce its net income by $40,800. Answer 2-a. Segmented Income Statement Totals Dirt Bikes Mountain Bikes Racing Bikes Sales                 926,000                  269,000                        402,000                   255,000 Variable Manufacturing & Selling Expenses                 478,000                  111,000                        209,000                   158,000 Contribution Margin                 448,000                  158,000                        193,000                     97,000 Traceable Fixed Expenses Advertsing                   69,600                       9,000                           40,400                     20,200 Depreciation of Special Equipment                   43,300                    20,400                             7,200                     15,700 Salaries of Product-Line Managers                 115,600                    40,900                           38,700                     36,000 Total Traceable Fixed Expenses                 228,500                    70,300                           86,300                     71,900 Segmented Income (Loss)                 219,500                    87,700                        106,700                     25,100 Allocated Common Fixed Expenses                 185,200 Net Operating Income (Loss)                   34,300 Answer 2-b. Yes The segmented income statement is more helpful in making decision regarding continuing or dropping the product.

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