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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:

Total Dirt Bikes

Mountain

Bikes

Racing Bikes
Sales $ 926,000 $ 261,000 $ 410,000 $ 255,000
Variable manufacturing and selling expenses 464,000 115,000 199,000 150,000
Contribution margin 462,000 146,000 211,000 105,000
Fixed expenses:
Advertising, traceable 69,000 8,200 40,300 20,500
Depreciation of special equipment 43,700 20,900 7,100 15,700
Salaries of product-line managers 114,400 40,600 38,600 35,200
Allocated common fixed expenses* 185,200 52,200 82,000 51,000
Total fixed expenses 412,300 121,900 168,000 122,400
Net operating income (loss) $ 49,700 $ 24,100 $ 43,000 $ (17,400)
*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.)

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)

Should production and sale of the racing bikes be discontinued?

Yes

No

Prepare a segmented income statement.

totals

Dirt bike

Mountain bikes

Racing bikes

Contribution margin (loss)

Fixed expenses:

Total traceable fixed expenses

Net operating income (loss)

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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