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 $400,000 207,000 Racing Total es es Variable manufacturing and selling expenses Contribution margin Fixed expenses S 921,000 481.000 440,000 $261,000 120,000 141.000 $260,000 154,000 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses 69,800 44,300 114,200 184,200 8.200 20,800 40,400 40,800 7,700 38,800 20,800 15,800 35,000 52,000 52.20080,000_ Total fixed expenses 121,600 167,300 123,600 Net operating income (loss) S 27,500 S 19.400 S (17,600 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. uired; 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 Dropped Difference: Net Operating Income Increase or (Decrease) Current Total S 921,000S 661,000 327,000 334,000 481,000 Variable manufacturing and selling expenses Contribution margin (loss) Fixed expenses 440,000 Advertising, traceable Depreciation on special equipment Salaries of product managers Common allocated costs 69,800 44,300 114,200 184,200 412.500 49,000 28,500 79,200 132,200 288,900 Total fixed expenses Net operating income (loss) Red text indicates no response was expected in a cell or a formula-based calculation is incorrect; no points deducted 27,500 S 45,100 S 1b. Should production and sale of the racing bikes be discontinued? No 2a. Prepare a segmented income statement. Totals Dirt Bikes Mountain Bikes Racing Bikes Variable manufacturing and selling expenses Contribution margin (loss) Traceable fixed expenses Advertising, traceable 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 Dropped Difference: Net Operating Income Increase or (Decrease) Current Total Sales Variable manufacturing and selling expenses Contribution margin (loss) Fixed expenses S 921,000S 661,000 327,000 334,000 481,000 440,000 Advertising, traceable Depreciation on special equipment Salaries of product managers Common allocated costs 69,800 44,300 114,200 184,200 412,500 49,000 28,500 79,200 132,200 288,900 Total fixed expenses Net operating income (loss) Red text indicates no response was expected in a cell or a formula-based calculation is incorrect; no points deducted 27,500 S 5,100 s 1b. Should production and sale of the racing bikes be discontinued? No 2a. Prepare a segmented income statement. Totals Dirt Bikes Mountain Bikes Racing Bikes Sales Variable manufacturing and selling expenses Contribution margin (loss) Traceable fixed expenses Advertising, traceable Depreciation of special equipment Salaries of the product line managers Total traceable fixed expenses Salaries of the product line managers Common fixed expenses Net operating income (loss) Red text indicates no response was expected in a cell or a formula-based calculation is incorrect; no points deducted 2b. Would a segmented income statement format be more usable to management in assessing the long-run profitability of the various product lines Yes
