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 Total Sales $935,000 $ 269,000 $ 408,000 $ 258,000 476,000 111,000 206,000 9,000 Variable manufacturing and selling expenses Contribution margin Fixed expenses 459,000 58,000 202,000 99,000 69,000 43,700 115,100 187,000 20,200 15,600 35,700 51,600 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* 8,600 20,200 40,900 53,800 40,200 7,900 38,500 81,600 Total fixed expenses 414,800123,500 168,200 123,100 Net operating income (loss) S 44,200 34,500 S 33,800 (24,100) 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.) Difference: Net Operating Income Increase or Decrease Total If Current Total Racing Bikes Are Dropped Contribution margin (loss) Fixed expenses Total fixed expenses Net operating income (loss)

Explanation / Answer

1a Current Total Total If Racing Bikes Are Dropped Difference: NetOperatingIncome Sales 935000 677000 -258000 Variable manufacturing and selling expenses 476000 317000 159000 Contribution margin (loss) 459000 360000 -99000 Fixed expenses: Advertising, traceable 69000 48800 20200 Depreciation on special equipment 43700 43700 0 Salaries of product manager 115100 79400 35700 Common allocated costs 187000 187000 0 Total fixed expenses 414800 358900 55900 Net operating income (loss) 44200 1100 -43100 1b No 2a Total Dirt Bikes Mountain Bikes Racing Bikes Sales 935000 269000 408000 258000 Variable manufacturing and selling expenses 476000 111000 206000 159000 Contribution margin (loss) 459000 158000 202000 99000 Traceable fixed expenses: Advertising, traceable 69000 8600 40200 20200 Depreciation on special equipment 43700 20200 7900 15600 Salaries of product manager 115100 40900 38500 35700 Total traceable fixed expenses 227800 69700 86600 71500 Product line segment margin 231200 88300 115400 27500 Common fixed expenses 187000 Net operating income (loss) 44200 2b Yes

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