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

Bikes

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.

What is the impact on net operating income by discontinuing racing bikes?

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:

Explanation / Answer

Current Total Total If Racing Bikes Are Dropped Difference Sales 926000 672000 -254000 Variable manufacturing and selling expenses 463000 312000 151000 Contribution margin (loss) 463000 360000 -103000 Fixed expenses: Advertising, traceable 69900 49100 20800 Depreciation on special equipment 44100 44100 0 Salaries of product managers 115500 78900 36600 Common allocated costs 185200 185200 0 Total fixed expenses 414700 357300 57400 Net operating income (loss) 48300 2700 -45600 2a Total Dirt Bikes Mountain Bikes Racing Bikes Sales 926000 270000 402000 254000 Variable manufacturing and selling expenses 463000 119000 193000 151000 Contribution margin (loss) 463000 151000 209000 103000 Traceable fixed expenses: Advertising, traceable 69900 8700 40400 20800 Depreciation on special equipment 44100 20500 7800 15800 Salaries of product managers 115500 40100 38800 36600 Total traceable fixed expenses 229500 69300 87000 73200 Product line segment margin 233500 81700 122000 29800 Common fixed expenses 185200 Net operating income (loss) 48300

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