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 Racing Bikes S 926,000 $ 265,000 404,000 257,000 476,000 114,000 208,000 154,000 Total Bikes Bikes Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses: 450,000 51,000 196,000 103,000 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses 69,800 44,100 115,200 185,200 8,800 20,400 40,200 53,000 40,400 8,000 39,000 80,800 20,600 15,700 36,000 51.400 Total fixed expenses 414,300 122,400 168,200 123,700 Net operating income (loss) 35,700 28,600 27,800 $ (20,700) 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 Required a. What is the impact on net operating income by discontinuing racing bikes? (Decreases should be indicated by a minus sign.) Difference: Net Total If Racing Bikes Are Dropped Operating Income Increase or Decrease) Current Total ales ariable manufacturing and selling expenses Contribution margin (loss) Fixed expenses: Advertising, traceable Depreciation on special equipment Salaries of Common allocated costs managers Total fixed expenses Net operating income (loss) b. Prepare a segmented income statement. Totals Dirt Bikes Mountain Bikes Racing Bikes Sales ariable manufacturing and selling expenses Contribution margin (loss) Traceable fixed expenses Advertising Depreciation of special equipment Salaries of the product line managers Total traceable fixed expenses Product line segment margin Common fixed expenses Net operating income (loss)

Explanation / Answer

Racke bike difference 1a) Current total dropped Sales 926,000 669000 -257,000 variable manufacturing & selling expense 476,000 322000 154,000 contribution margin (loss) 450,000 347000 -103,000 fixed expenses advertising,traceable 69,800 49200 20600 depreication on special equipment 44,100 44,100 0 Salaries of product managers 115,200 79200 36000 common allocated costs 185,200 185,200 0 total fixed expense 414,300 357700 56600 net operating income(loss) 35,700 -10700 -46400 2a) dirt mountain racin total bikes bikes bikes Sales 926,000 265,000 404,000 257,000 variable manufacturing & selling expense 476,000 114,000 208,000 154,000 contribution margin (loss) 450,000 151,000 196,000 103,000 Traceable fixed expenses advertising 69,800 8,800 40,400 20,600 depreciatiopn on special equipment 44,100 20,400 8,000 15,700 salaries of product managers 115,200 40,200 39,000 36,000 total traceable fixed expenses 229,100 69,400 87,400 72,300 product line segment margin 220,900 81,600 108,600 30,700 common fixed expenses 185,200 net operating income (loss) 35,700

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