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 Bikes Mountain Racing Bikes Total Bikes 933,000 $267,000 $407,000 $259,000 120,000 203,000 155,000 Variable manufacturing and selling expenses478,000 120,000 203,000 155,000 Sales Contribution margin 455,000 147,000 204,000 104,000 Fixed expenses: Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses 69,300 8,500 40,600 20,200 7,900 15,400 14,700 40,400 38,800 35,500 186,600 53,400 81,400 51,800 44,000 20,700 Total fixed expenses 414,600 123,000 168,700 122,900 Net operating income (loss) $ 40,400 24,000 35,300 (18,900) Allocated on the basis of sales dollars. Management is concemed 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 bre indicated by a minus sign.) Total If Racing Operating Income Increa or (Decrease) Net Current TotalBikes Are Sales and selling expenses margin (loss) Fixed €penses: Depreciation on special equipment Salaries of product Total fixed expensets Net operating income (oss) 1b. Should production and sale of the racing bikes be discontinued? Yes No 2a. Prepare a segmented income statement

Explanation / Answer

Solution 1a:

Solution 1b:

As there is net financial disadvantage of $48,300 on discontinue of racing bikes therefore production and sale of racing bikes should not be discontinued.

Solution 2a:

Solution 2b:

Yes, segmanted income statement format be more useable to management in assessing the long run profitability of the various product lines.

Impact on net income on discontinuing racing bike Particulars Current Total Total if racing bikes are dropped Difference: Net Operating income increase (decrease) Sales $933,000.00 $674,000.00 -$259,000.00 Variable manufacturing and selling expenses $478,000.00 $323,000.00 -$155,000.00 Contribution margin $455,000.00 $351,000.00 -$104,000.00 Fixed expenses: Advertising traceable $69,300.00 $49,100.00 -$20,200.00 Depreciation of special equipment $44,000.00 $44,000.00 $0.00 Salaries of product manager $114,700.00 $79,200.00 -$35,500.00 Common allocated costs $186,600.00 $186,600.00 $0.00 Total fixed expenses $414,600.00 $358,900.00 -$55,700.00 Net Operating income (loss) $40,400.00 -$7,900.00 -$48,300.00

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