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

a)

Impact on net operating income by discontinuing racing bikes = Saving of Advertising, traceable cost + Salaries of product-line managers - Contribution margin lost

Impact on net operating income by discontinuing racing bikes = 6000+ 10000-27000

Impact on net operating income by discontinuing racing bikes = -11000

Answer

Net Operating Income decreases by - $ 11000

Note : Allocated common fixed expenses & Depreciation of special equipment are sunk cost therefore irrelevant cost

1b) Should production and sale of the racing bikes be discontinued?

No

2a)

2b)

Yes

Total Dirt Bikes Mountain Bikes Racing Bikes   Sales 300,000 90,000 150,000 60,000   Variable manufacturing and selling expenses 120,000 27,000 60,000 33,000   Contribution margin 180,000 63,000 90,000 27,000   Fixed expenses:     Advertising, traceable 30,000 10,000 14,000 6,000     Depreciation of special equipment 23,000 6,000 9,000 8,000     Salaries of product-line managers 35,000 12,000 13,000 10,000 Traceable Fixed Cost 88,000 28000 36000 24000 Segment Margin 92,000 35,000 54,000 3,000 common fixed expenses* 60,000   Net operating income (loss) 32,000

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.