Exercise 12-2 Dropping or Retaining a Segment [L012-2] The Regal Cycle Company m

Question

Exercise 12-2 Dropping or Retaining a Segment [L012-2] 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 Mountain Racing Bikes 5 926,000 S 264,000 406,000 5 258,000 460,000 112,000 94,000 154,000 Total Bikes Bikes Sales Variable manufacturing and selling expenses Contribution margin 486,000 152,000 212,000 102,000 Foxed expenses: Advertising, traceable Depreciation of special equipment 70,000 43,500 115,100 185,200 8,900 20,100 40,300 52,800 40,800 7,800 38,400 81,200 20,500 15,600 36,400 51,200 Salaries of product-ine managers Allocated common foed expenses Total fioxed expenses 13,800 22,100 168,000 123,700 Net operating income (loss) S 52,200 S 29,900 S 44,000 S (21,700) 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 a. What is the impact on net operating income by discontinuing racing bikes? (Decreases should be indicated by a minus sign.) Total If Current Total Racing BikesIncome Are Dropped Increase or Contribution margin (loss) Fixed expenses: Total fixed expenses Net operating income (loss)

Explanation / Answer

Req 1-A Current Total Total if Racing Difference: Bikes are dropped Income increase/(Decrease) Sales Revenue 926000 670000 -256000 Less: Variable cost 460000 306000 154000 Contribution margin (Loss) 466000 364000 -102,000 Less: Fixed Expense Advertising-Traceable 70,000 49500 20500 Depreciation-Special Equipment 43500 43500 0 Salaries of Product Line Manager 115100 78700 36400 Allocated Common Fixed Expense 185200 185200 0 Net Operating Income/(Loss) 52,200 7,100 45,100 . Req 1-B NO… Production and sale of racing bikes should not stopped It will lead to reduction in net operating income by $ 45,100 Note: Depreciation on special equipment and allocated common fixed expense will bound to occur. Hence is not relevant. Req 2-A SEGMENTED INCOME STATEMENT TOTALS DIRT BIKES MOUNTAIN BIKES RACING BIKES Sales Revenue 926000 264000 406000 256000 Less: Variable cost 460000 112000 194000 154000 Contribution margin (Loss) 466000 152000 212000 102000 Less:Traceable Fixed Expense Advertising-Traceable 70000 8900 40600 20500 Depreciation-Special Equipment 43500 20100 7800 15600 Salaries of Product Line Manager 115100 40300 38400 36400 Total Traceable Fixed Expense 228600 69300 86800 72500 Segmented Net operating income 237400 82700 125200 29500 Less: Common Fixed Expense 185200 Net Operating Income/(Loss) 52200 Req2-B: YES, Segmented Income statement would be more usable for management in assessing the long run profitability.

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

---

---

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