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 | $ | 921,000 | $ | 261,000 | $ | 407,000 | $ | 253,000 |
Variable manufacturing and selling expenses | 465,000 | 111,000 | 203,000 | 151,000 | ||||
Contribution margin | 456,000 | 150,000 | 204,000 | 102,000 | ||||
Fixed expenses: | ||||||||
Advertising, traceable | 69,400 | 8,300 | 41,000 | 20,100 | ||||
Depreciation of special equipment | 44,000 | 20,600 | 7,500 | 15,900 | ||||
Salaries of product-line managers | 115,400 | 40,900 | 38,200 | 36,300 | ||||
Allocated common fixed expenses* | 184,200 | 52,200 | 81,400 | 50,600 | ||||
Total fixed expenses | 413,000 | 122,000 | 168,100 | 122,900 | ||||
Net operating income (loss) | $ | 43,000 | $ | 28,000 | $ | 35,900 | $ | (20,900) |
*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.) |
2a. | Prepare a segmented income statement. |
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