Could someone please help me solve this? The Regal Cycle Company manufactures th

Question

Could someone please help me solve this?

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 S925,000 263,000 S 406,000 256,000 480,000 13,000 209,000 158,000 Total Bikes Bikes Sales Variable manufacturing and selling expenses Contribution marg n Fixed expenses 445,000 150,000 197,000 98,000 Advertising. traceable Dapreciation of special equipment Salaries of product-line managers Allocated common fixed expenses 63,900 43,600 115,700 20,300 15,700 36,800 185,000 52,600 81,200 51,200 0.400 20.400 40,000 10,200 7,500 38,900 Total fixed expenses 413,200 121,400 167,800 124,000 Net operating income (loss) S 31,800 S 28,600 S 29,200 (26,000) 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: 1a. What is the impact on net operating income by discontinuing racing bikes? (Decreases should be indicated by a minus sign.) Total If Racing Bikes Are Operating Dropped Current Total Increase or (Decrease) Contribution margin (loss) Fixed expenses: Total fixed expenses Net operating income (loss) 1b. Should production and sale of the racing bikes be discontinued? O Yes No 2a. Prepars a segmented income statement. Totals Dirt Bikes Mountain Bikes Racing Bikes Contribution margin (loss) Traceable fixed expenses Total traceable fixed expenses Net operating income (loss) 2b. Would a segmented income statement format be more usablto mnagement in assessing the long- run profitability of the various product lines O Yes

Explanation / Answer

1-a) Current Total Total If Racing Bikes Are Stopped Difference: Net Operating income Increase or (Decrease) Sales 925000 669000 -256000 (925000-256000) Variable manufacturing and selling expenses 480000 322000 -158000 (480000-158000) Contribution margin (loss) 445000 347000 -98000 Fixed expenses: Advertising, traceable 68900 48600 20300 (68900-20300) Depreciation of special equipment 43600 27900 15700 (43600-15700) Salaries of product line managers 115700 78900 36800 (115700-36800) Allocated common fixed expenses 185000 185000 0 Total fixed expenses 413200 340400 72800 Net operating income (loss) 31800 6600 -25200 1-b) No Because it reduces overall income by $25200 2-a) Totals Dirt Bikes Mountaing Bikes Racing Bikes Sales 925000 263000 406000 256000 Variable manufacturing and selling expenses 480000 113000 209000 158000 Contribution margin (loss) 445000 150000 197000 98000 Traceable fixed expenses: Advertising, traceable 68900 8400 40200 20300 Depreciation of special equipment 43600 20400 7500 15700 Salaries of product line managers 115700 40000 38900 36800 Total Traceable fixed expenses 228200 68800 86600 72800 Segment margin 216800 81200 110400 25200 Common fixed expenses: Allocated common fixed expenses 185000 Net operating income (loss) 31800 2-b) Yes Because it provide us the segment results which will help us to make a decision whether the decision it to continued or drop it

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