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 | $ | 931,000 | $ | 265,000 | $ | 408,000 | $ | 258,000 |
Variable manufacturing and selling expenses | 477,000 | 114,000 | 210,000 | 153,000 | ||||
Contribution margin | 454,000 | 151,000 | 198,000 | 105,000 | ||||
Fixed expenses: | ||||||||
Advertising, traceable | 69,000 | 8,300 | 40,100 | 20,600 | ||||
Depreciation of special equipment | 44,300 | 21,000 | 7,400 | 15,900 | ||||
Salaries of product-line managers | 115,600 | 40,400 | 38,200 | 37,000 | ||||
Allocated common fixed expenses* | 186,200 | 53,000 | 81,600 | 51,600 | ||||
Total fixed expenses | 415,100 | 122,700 | 167,300 | 125,100 | ||||
Net operating income (loss) | $ | 38,900 | $ | 28,300 | $ | 30,700 | $ | (20,100) |
*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? | ||||
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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. | ||||
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