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: *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. What is the amount of the change in net income if the racing bikes is dropped? (Input the amount as positive value. Omit the "$" sign in your response.)

Explanation / Answer

Current Net Income = $44,200 ..................(A) Cont from Racing bikes is $100,000 Fixed expenses which will still be incurred if Racing bike is dropped are:- Dep $15,200 Allocated Fixed exp $46,200 ------------------------------------------------ Total Fixed exp incurred post closure of Racing bike $61,400 As there is no Contribution, there will be an addl expe of $61,400 which has to be born by other two units SO New Net Income = $22300+40400 - $61400 = $1,300 SO New Net Income post closure will be $1300 ................Ans(1) Incase, The Racing unit is sold-off, the Dep exp will not be incurred. In such case, the New Net Income = $1300+$15200 = $16,500 .................Ans (2) But in any case, Post CLosure, Net income will reduce from earlier Net Inc of $44,200. SO it is advisable NOT to close the Racing bike unit -----------------------------

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