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. 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: What is the impact on net operating income by discontinuing racing bikes? (Decreases should be indicated by a minus sign.) Should production and sale of the racing bikes be discontinued? Prepare a segmented income statement.

Explanation / Answer

1(a) Statement showing impact on net operating income

(b) No, the product should not be discountinued since overall contribution decreases.

2.Segment wise Income statement

Current Total Total if racing bikes are dropped Difference Sales $928000 $668000 ($260000) Variable manufacturing and selling cost $470000 $317000 $153000 Contribution $458000 $351000 ($107000) Less: Fixed costs Advertising $70600 $70600 Nil Depreciation of special equipment $44200 $44200 Nil Salaries of production line manger $115700 $115700 Nil Common fixed expenses $185600 $185600 Nill Total effect on net operating income ($107000)

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