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

1a Current Total Total If Racing Bikes Are Dropped Difference: NetOperatingIncome Sales 927000 673000 -256000 Variable manufacturing and selling expenses 472000 320000 152000 Contribution margin (loss) 455000 353000 -104000 Fixed expenses: Advertising, traceable 69600 49400 20200 Depreciation on special equipment 43400 43400 0 Salaries of product manager 115000 79100 35900 Common allocated costs 185400 185400 0 Total fixed expenses 413400 357300 56100 Net operating income (loss) 41600 -4300 -47900 1b No 2a Total Dirt Bikes Mountain Bikes Racing Bikes Sales 927000 267000 404000 256000 Variable manufacturing and selling expenses 472000 119000 201000 152000 Contribution margin (loss) 455000 148000 203000 104000 Traceable fixed expenses: Advertising, traceable 69600 8700 40700 20200 Depreciation on special equipment 43400 21000 7200 15200 Salaries of product manager 115000 40500 38600 35900 Total traceable fixed expenses 228000 70200 86500 71300 Product line segment margin 227000 77800 116500 32700 Common fixed expenses 185400 Net operating income (loss) 41600 2b Yes

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