Question

The Regal Cycle Company manufactures three types of bicycles—a 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	$	924,000	$	266,000	$	403,000	$	255,000
Variable manufacturing and selling expenses		480,000		120,000		209,000		151,000
Contribution margin		444,000		146,000		194,000		104,000
Fixed expenses:
Advertising, traceable		69,400		8,600		40,200		20,600
Depreciation of special equipment		43,900		20,400		7,800		15,700
Salaries of product-line managers		115,500		40,700		38,100		36,700
Allocated common fixed expenses*		184,800		53,200		80,600		51,000
Total fixed expenses		413,600		122,900		166,700		124,000
Net operating income (loss)	$	30,400	$	23,100	$	27,300	$	(20,000)

*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

Answer 1

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