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: Racing Bikes $936,000 268,000 $ 409,000 $ 259,000 461,000 115,000 195,000 151,000 Dirt Bikes Mountain Bikes Total Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses 475,000 153,000 214,000 108,000 69,900 43,100 116,200 187,200 8,600 20,400 40,900 53,600 40,900 7,300 38,700 81,800 20,400 15,400 36,600 51,800 Advertising, traceable Depreciation of special e Salaries of product-line managers Allocated common fixed expenses quipment Total fixed expenses 416,400 123,500 168,700 124,200 Net operating income (loss) $58,600 29,500 45,300 $ (16,200) Allocate d 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.

Explanation / Answer

Statement showing computations Particulars Current Total Total if Racingbike is dropped Difference Sales                   936,000.00                                            677,000.00                       259,000.00 Variable Manu and Selling                   461,000.00                                            310,000.00                       151,000.00 Contribution Margin                   475,000.00                                            367,000.00                       108,000.00 Fixed Expenses: Advertising                     69,900.00                                               49,500.00                         20,400.00 Depreciation                     27,700.00                                               27,700.00                                         -   Salaries of product Line manger                   116,200.00                                               79,600.00                         36,600.00 Allocated Fixed Expenses                   187,200.00                                            187,200.00                                         -   Total Fixed Expenses                   401,000.00                                            344,000.00                         57,000.00 Net operating income                     74,000.00                                               23,000.00                         51,000.00 No since Net operating income will fall by 51000 if Racing Bikes are discontinued Particulars Total   Dirt Bikes Mountain Bikes Racing Bikes Contribution Margin                   475,000.00                                            153,000.00                       214,000.00        108,000.00 Traceable fixed Expenses: Advertising                     69,900.00                                                 8,600.00                         40,900.00          20,400.00 Depreciation                     27,700.00                                               20,400.00                            7,300.00 Salaries of product Line manger                   116,200.00                                               40,900.00                         38,700.00          36,600.00 Total Traceable fixed Expenses                   213,800.00                                               69,900.00                         86,900.00          57,000.00 Net Operating Income                   261,200.00                                               83,100.00                       127,100.00          51,000.00

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