Michaels Bicycles manufactures different types of bicycles: mountain, road, and youth. Sales of the road bikes have fallen. The firm is considering two options:

(1) drop the road bike line; or

(2) replace the road bike line with fat tire bikes.

Price and cost data are as follows:

	Mountain	Road	Youth	Fat Tire
Price/unit	$400	$1200	$120	$600
Variable cost/unit	$300	$600	$75	$400
Total Fixed costs	$3,000,000	$2,500,000	$500,000	$1,000,000
Number of units	15,000	4,000	20,000	10,000

If the road bike line is dropped, 60% of the $2,500,000 fixed cost is avoidable.

Required:

a) Calculate the increase or decrease on operating income, using relevant amounts only, for option 1. Be sure to indicate if the operating profits increase or decrease. (3 marks)

b) Calculate the increase or decrease on operating income, using relevant amounts only, for option 2. Be sure to indicate if the operating profits increase or decrease. (4 marks)

c) Which option is best? Identify one longer term strategic issue the firm should consider before making the final decision. (2 marks)