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:

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:

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 Racing Bikes $927,000 265,000 $ 408,000 254,000 476,000 9,000 197,000 160,000 Total Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses 451,000 146,000 211,000 94,000 69,900 42,700 115,600 185,400 8,600 20,300 40,200 53,000 40,700 7,200 38,600 81,600 20,600 15,200 36,800 50,800 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses Total fixed expenses 413,600 122,100 168,100 123,400 Net operating income (loss) S 37,400 23,900 42,900 (29,400) Allocated on the basis of sales dollars Management is concemed 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

Part 1 A

Part 1 B

NO, because due to discontinuation of racing bikes there is decrease in net operating income.

Part 2 A

Part 2 B

YES, segmented income statement would be more useful.

Current total total if racing bikes are dropped difference : Net operating income increase or (decrease) Sales 927000 673000 (254000) Variable manufacturing and selling expenses 476000 316000 160000 Contribution margin (loss) 451000 357000 (94000) Fixed expenses: Advertising Traceable 69900 49300 20600 Depreciation on special equipment 42700 42700 0 Salaries of product manager 115600 78800 36800 Common allocated costs 185400 185400 0 Total fixed expenses 413600 356200 57400 Net operating income (loss) 37400 800 36600

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