Question
The Regal Cycle Company manufactures three types of bicyclesa dirt bike, a mountain bike, and a racing bike. Data on sales and expenses for the
The Regal Cycle Company manufactures three types of bicyclesa dirt bike, a mountain bike, and a racing bike. Data on sales and expenses for the past quarter follow:
Total | Dirt Bikes | Mountain Bikes | Racing Bikes | ||||||||||||
Sales | $ | 922,000 | $ | 262,000 | $ | 404,000 | $ | 256,000 | |||||||
Variable manufacturing and selling expenses | 462,000 | 112,000 | 195,000 | 155,000 | |||||||||||
Contribution margin | 460,000 | 150,000 | 209,000 | 101,000 | |||||||||||
Fixed expenses: | |||||||||||||||
Advertising, traceable | 69,600 | 8,800 | 40,600 | 20,200 | |||||||||||
Depreciation of special equipment | 44,400 | 20,900 | 7,700 | 15,800 | |||||||||||
Salaries of product-line managers | 115,500 | 40,600 | 38,700 | 36,200 | |||||||||||
Allocated common fixed expenses* | 184,400 | 52,400 | 80,800 | 51,200 | |||||||||||
Total fixed expenses | 413,900 | 122,700 | 167,800 | 123,400 |
| ||||||||||
Net operating income (loss) | $ | 46,100 | $ | 27,300 | $ | 41,200 | $ | (22,400) | |||||||
|
*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.)
1b. Should production and sale of the racing bikes be discontinued?
Yes | |
No |
2a. Prepare a segmented income statement.
2b. Would a segmented income statement format be more usable to management in assessing the long-run profitability of the various product lines.
Yes | |
No |
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