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:

Mountain

Bikes

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.

What is the impact on net operating income by discontinuing racing bikes? (Decreases should be indicated by a minus sign.)

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

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

Answer 1 (a)= By discontinuing the racing bikes segment, Contribution of the firm reduced by $ 107,000. It means company profit decrease by $ 107,000.

Answer 1(b)- No, Racing bikes segment should not be discontinued.

Answer 2(a)- Segment wise profitablity already given in Question.

Answer 2(b)- Yes , Segment wise income statement helps the management in decision making.

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