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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: Dirt Bikes $ 267,000 120,000 Total $ 923,000 464,000 Mountain Bikes $ 405,000 194,000 Racing Bikes $ 251,000 150,000 Sales Variable manufacturing and selling expenses Contribution margin 459,000 147,000 211,000 101,000 Fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses 69,900 44,200 116,200 184,600 8,700 20,800 40,500 53,400 40,900 7,500 39,000 81,000 20,300 15,900 36,700 50,200 Total fixed expenses 414,900 123,400 168,400 123,100 Net operating income (loss) $ 44,100 $ 23,600 $ 42,600 $ (22,100) *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: la. What is the impact on net operating income by discontinuing racing bikes? (Decreases should be indicated by a minus sign.) Current Total Total If Racing Bikes Are Dropped Difference: Net Operating Income Increase or (Decrease) Contribution margin (loss) Fixed expenses: Total fixed expenses Net operating income (loss) 0 0 $ 0 $ 1b. Should production and sale of the racing bikes be discontinued? Yes No 2a. Prepare a segmented income statement Totals Dirt Bikes Mountain Bikes Racing Bikes 0 000 Sales Variable manufacturing and selling expenses Contribution margin (loss) Traceable fixed expenses: Advertising Depreciation of special equipment Salaries of the product line managers Total traceable fixed expenses Product line segment margin 1 Common fixed expenses Net operating income (loss) 0 $ 0 $ 0 $ 0 $ 0 2b. Would a segmented income statement format be more usable to management in assessing the long- run profitability of the various product lines. Yes
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