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 5 925,000 S 264,000 404,000 5 257,000 462,000 113,000 92,000 157,000 Total Bikes Bikes Sales Variable manufacturing and selling expenses Contribution margin Foxed expenses: Depreciation of special equipment 463,000 151,000 212,000 100,000 69,800 43,900 115,300 185,000 8,400 20,200 40,900 52,800 40,800 7,800 38,200 80,800 20,800 15,900 36,200 51,400 Salaries of product-ine managers Allocated common foed expenses Total fioxed expenses 14,000 22,300 17,400 124,300 Net operating income (loss) 5 49,000 S 28,700 S 44,600 S (24,300) 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 Bikes Income Are Dropped Increase or Contribution margin (loss Fixed expenses: Total fixed expenses Net operating income (loss)

Explanation / Answer

Current Total Total If Racing Bikes Are Dropped Difference: Net Operating Income Increase or (Decrease Sales $925,000 $668,000 -$257,000 Variable manufacturing and selling expenses $462,000 $305,000 $157,000 Contribution margin $463,000 $363,000 -$100,000 Fixed expenses: Advertising, traceable $69,800 $49,000 $20,800 Depreciation of special equipment $43,900 $43,900 0 Salaries of product-line managers $115,300 $79,100 $36,200 Allocated common fixed expenses* $185,000 $185,000 0 Total fixed expenses $414,000 $357,000 $57,000 Net operating income (loss) $49,000 $6,000 -$43,000 b)No, it should not be discontinued. 2) Total Dirt Bikes Mountain Bikes Racing Bikes Sales $925,000 $264,000 $404,000 $257,000 Variable manufacturing and selling expenses $462,000 $113,000 $192,000 $157,000 Contribution margin $463,000 $151,000 $212,000 $100,000 Traceable Fixed expenses: Advertising, traceable $69,800 $8,400 $40,600 $20,800 Depreciation of special equipment $43,900 $20,200 $7,800 $15,900 Salaries of product-line managers $115,300 $40,900 $38,200 $36,200 Total traceable fixed expenses $229,000 $69,500 $86,600 $72,900 Product line segment margin $234,000 $81,500 $125,400 $27,100 Common fixed expenses $185,000 Net operating income (loss) $49,000 b) Yes,a segmented income statement format would be more usable to management in assessing the long-run profitability of the various product lines.

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