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 Dirt Bikes Mountain Racing Bikes $920,000 S 268,000 $ 401,000 $ 251,000 57,000 110,000 193,000 154,000 Total Bikes Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses 463,000 158,000 208,000 97,000 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses 69,900 44,300 114,700 184,000 8,700 20,800 40,400 53,600 40,700 7,700 38,300 80,200 20,500 15,800 36,000 50,200 Total fixed expenses 412,900 123,500 166,900 122,500 Net operating income (loss) S 50,100 S 34,500 S 41,100 $ (25,500) *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.)

Explanation / Answer

1a Current Total Total If Racing Bikes Are Dropped Difference: NetOperatingIncome Sales 920000 669000 -251000 Variable manufacturing and selling expenses 457000 303000 154000 Contribution margin (loss) 463000 366000 -97000 Fixed expenses: Advertising, traceable 69900 49400 20500 Depreciation on special equipment 44300 44300 0 Salaries of product manager 114700 78700 36000 Common allocated costs 184000 183800 200 Total fixed expenses 412900 356200 56700 Net operating income (loss) 50100 9800 -40300 1b No 2a Total Dirt Bikes Mountain Bikes Racing Bikes Sales 920000 268000 401000 251000 Variable manufacturing and selling expenses 457000 110000 193000 154000 Contribution margin (loss) 463000 158000 208000 97000 Traceable fixed expenses: Advertising, traceable 69900 8700 40700 20500 Depreciation on special equipment 44300 20800 7700 15800 Salaries of product manager 114700 40400 38300 36000 Total traceable fixed expenses 228900 69900 86700 72300 Product line segment margin 234100 88100 121300 24700 Common fixed expenses 184000 Net operating income (loss) 50100 2b Yes

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