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 | $ | 926,000 | $ | 268,000 | $ | 406,000 | $ | 252,000 | |||||||
Variable manufacturing and selling expenses | 473,000 | 115,000 | 200,000 | 158,000 | |||||||||||
Contribution margin | 453,000 | 153,000 | 206,000 | 94,000 | |||||||||||
Fixed expenses: | |||||||||||||||
Advertising, traceable | 69,700 | 8,400 | 40,400 | 20,900 | |||||||||||
Depreciation of special equipment | 42,700 | 20,100 | 7,300 | 15,300 | |||||||||||
Salaries of product-line managers | 116,200 | 40,800 | 38,900 | 36,500 | |||||||||||
Allocated common fixed expenses* | 185,200 | 53,600 | 81,200 | 50,400 | |||||||||||
Total fixed expenses | 413,800 | 122,900 | 167,800 | 123,100 |
| ||||||||||
Net operating income (loss) | $ | 39,200 | $ | 30,100 | $ | 38,200 | $ | (29,100) | |||||||
|
*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?
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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