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: Dirt Bikes Mountain Racing Total Bikes Bikes Sales $924,000 $ 265,000 $ 404,000 $ 255,000 465,000 115,000196,000 154,000 Variable manufacturing and selling expenses Contribution margin Fixed expenses 459,000 50,000 208,000 101,000 69,800 43,600 115,000 184,800 8,600 20,600 40,300 53,000 40,300 7,300 38,700 80,800 Advertising, traceable Depreciation of special Salaries of product-line managers Allocated common fixed expenses 20,900 15,700 36,000 51,000 equipment Total fixed expenses 413,200 122,500 167,100 123,600 Net operating income (loss) $ 45,800 S 27,500 40,900 $ (22,600) 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.) Difference: Net Operating Income Increase or Decrease Total If Current Total Racing Bikes Are Dropped Contribution margin (loss) Fixed expenses Total fixed expenses Net operating income (loss)

Explanation / Answer

1a Current Total Total If Racing Bikes Are Dropped Difference: NetOperatingIncome Sales 924000 669000 -255000 Variable manufacturing and selling expenses 465000 311000 154000 Contribution margin (loss) 459000 358000 -101000 Fixed expenses: Advertising, traceable 69800 48900 20900 Depreciation on special equipment 43600 43600 0 Salaries of product managers 115000 79000 36000 Common allocated costs 184800 184800 0 Total fixed expenses 413200 356300 56900 Net operating income (loss) 45800 1700 -44100 1b No 2a Totals Dirt Bikes Mountain Bikes Racing Bikes Sales 924000 265000 404000 255000 Variable manufacturing and selling expenses 465000 115000 196000 154000 Contribution margin (loss) 459000 150000 208000 101000 Traceable fixed expenses: Advertising, traceable 69800 8600 40300 20900 Depreciation on special equipment 43600 20600 7300 15700 Salaries of product managers 115000 40300 38700 36000 Total traceable fixed expenses 228400 69500 86300 72600 Product line segment margin 230600 80500 121700 28400 Common fixed expenses 184800 Net operating income (loss) 45800 2b Yes

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