Exercise 10-2 Dropping or Retaining a Segment [LO10-2] The Regal Cycle Company m

Question

Exercise 10-2 Dropping or Retaining a Segment [LO10-2]

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

1a: Impact on Net Operating Income (+21900-51200)=-29300

1b: No

2a:

2b: YES

Total Dirt Mountain Bikes Bikes   Sales $ 663000 $ 262000 $ 401000   Variable manufacturing and selling expenses 313000 119000 194000   Contribution margin 350000 143000 207000   Fixed expenses:     Advertising, traceable 48900 8400 40500     Depreciation of special equipment 27700 20300 7400     Salaries of product-line managers 79600 40900 38700     Allocated common fixed expenses* 183800 72633 111167   Total fixed expenses 340000 142233 197767   Net operating income (loss) $ 10000 $ 767 $ 9233

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