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:

Total

Dirt
Bikes

Mountain

Bikes

Racing
Bikes

  Sales

$

924,000

$

264,000

$

402,000  

$

258,000  

  Variable manufacturing and selling expenses

478,000

119,000

203,000  

156,000  

  Contribution margin

446,000

145,000

199,000

102,000  

  Fixed expenses:

    Advertising, traceable

69,200

8,800

40,200

20,200

    Depreciation of special equipment

43,800

20,700

8,000

15,100  

    Salaries of product-line managers

114,600

40,800

38,500

35,300  

    Allocated common fixed expenses*

184,800

52,800

80,400

51,600  

  Total fixed expenses

412,400

123,100

167,100

122,200  

  Net operating income (loss)

$

33,600

$

21,900  

$

31,900

$

(20,200)

*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.)

Current Total

Total If Racing Bikes Are Dropped

Difference: Net Operating Income Increase or (Decrease)

Contribution Margin (loss)

Fixed Expenses:

Total Fixed Expenses

Net Operating Income (loss)

$

$

$

1b.

Should production and sale of the racing bikes be discontinued?

__Yes

__No

  

2a.

Prepare a segmented income statement.

Totals

Dirt Bikes

Mountain Bikes

Racing Bikes

Contribution Margin (loss)

Traceable Fixed Expenses:

Total Traceable Fixed Expenses

$

$

$

Net Operating Income (loss)

$

2b.

Would a segmented income statement format be more usable to management in assessing the long-run profitability of the various product lines.

__Yes

__No

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:

Explanation / Answer

Current Racing net total bike drop Sales revenue 924,000 666,000 -258,000 Variable manufacturing & selling expenses 478,000 322,000 156,000 contribution(l0ss) 446,000 344,000 -102,000 Fixed expenses: Advertising tracebale 69,200 49,000 20,200 Depreciation on special 43,800 28,700 15,100 Salaries of pmanager 114,600 79,300 35,300 common costs 184,800 133,200 51,600 total fixed expenses 412,400 290,200 122,200 net operating income(lossO 33,600 53,800 -20,200 no Segmented income statement current to dirt mountain Racing Sales revenue 924,000 264,000 402,000 258,000 Variable maufacturing & selling expenses 478,000 119,000 203,000 156,000 Contribtuion 446,000 145,000 199,000 102,000 Fixed expenses Advertising tracebale 69,200 8,800 40,200 20,200 depreciation 43,800 20,700 8,000 15,100 salareis of managers 114,600 40,800 38,500 35,300 total traceable fixed costs 227,600 70,300 86,700 70,600 product line segment margin 218,400 74,700 112,300 31,400 common fixed expenses 184,800 Net operating income(loss) 33,600

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