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 Mountain Racing Total Bikes Bikes Bikes S 927,000 S 269,000 400,000 S 258,000 472,000 3,000 203,000 5000 Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses 455,000 5,000 197,000 102,000 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses 70,500 44,100 114,700 185,400 8,800 20,800 40.500 53,800 40,800 7,500 38,000 80,000 20,900 15,800 36,200 51,600 Total fixed expenses 14,700 123,900 166,300 124,500 Net operating income (loss) S 40,300 32,100 30,700 (22,500) 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 1a. What is the impact on net operating income by discontinuing racing bikes? (Decreases should be indicated by a minus sign.) Total If Operating Income Current Total Racing Bikes Are Dropped Increase or Contribution margin (loss) Fixed expenses Total fixed expenses Net operating income (loss)

Explanation / Answer

IMPACT ON NET INCOME IF RACING BIKE IS DISCOUNTED: (AMOUNT IN $)

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                                                     Current total           Total if Racing bikes are dropped   Diff.NOI: Inc/dec.

Contribuiton                                    455,000                                  353,000                            - 102,000         

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