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 Bikes Racin Bikes Total $920,000 S 263,000 $ 404,000 $ 253,000 473,000 118,000 196,000 159,000 Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses 447,000 45,000 208,000 94,000 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses 69,700 44,000 116,300 184,000 8,600 20,400 40,700 52,600 40,800 7,800 39,000 80,800 20,300 15,800 36,600 50,600 Total fixed expenses 14,000 122,300 168,400 123,300 Net operating income (loss) S 33,000 S 22,700 S 39,600 $ (29,300) 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

Explanation / Answer

1a Current Total Total If Racing Bikes Are Dropped Difference: NetOperatingIncome Sales 920000 667000 -253000 Variable manufacturing and selling expenses 473000 314000 159000 Contribution margin (loss) 447000 353000 -94000 Fixed expenses: Advertising, traceable 69700 49400 20300 Depreciation on special equipment 44000 44000 0 Salaries of product manager 116300 79700 36600 Common allocated costs 184000 184000 0 Total fixed expenses 414000 357100 56900 Net operating income (loss) 33000 -4100 -37100 1b No 2a Total Dirt Bikes Mountain Bikes Racing Bikes Sales 920000 263000 404000 253000 Variable manufacturing and selling expenses 473000 118000 196000 159000 Contribution margin (loss) 447000 145000 208000 94000 Traceable fixed expenses: Advertising, traceable 69700 8600 40800 20300 Depreciation on special equipment 44000 20400 7800 15800 Salaries of product manager 116300 40700 39000 36600 Total traceable fixed expenses 230000 69700 87600 72700 Product line segment margin 217000 75300 120400 21300 Common fixed expenses 184000 Net operating income (loss) 33000 2b Yes

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