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 Racing Bikes Dirt Mountain Total $923,000 $ 267,000 464,000 Bikes Bikes $ 405,000 $ 251,000 194,000 Sales Variable manufacturing and selling expenses 120,000 150,000 Contribution margin 147,000 101,000 211,000 459,000 Fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses 40,900 7,500 39,000 81,000 69,900 44,200 116,200 184,600 20,300 15,900 36,700 50,200 8,700 20,800 40,500 53.400 Total fixed expenses 123,400 414.900 168,400 123,100 $ 42,600 (22,100) $ 44,100 $ 23,600 Net operating income (loss) *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.) Difference: Net Total If Racing Operating Income Increase or Current Total Bikes Are Dropped (Decrease) Contribution margin (loss) 0 0 Fixed expenses: Total fixed expenses 0 0 0$ 0$ Net operating income (loss) 0

Answer 1

						total if	Difference
						racing bike
					Current	are
1-a)					total	dropped
	Sales				923,000	672000	-251,000
	Variable expenses				464,000	314000	150,000
	contribution margin (loss)				459,000	358000	-101,000
	fixed expenses
	Advertising,traceable				69,900	49600	20,300
	Depreciation on special equipment				44,200	44,200	0
	Salaries of product managers				116,200	79500	36,700
	common allocated costs				184,600	184,600	0
	total fixed expenses				414,900	357900	57,000
	Net operating income(loss)				44,100	100	-44,000
3)	Segmented Income statement
						Dirt	mountain	Racing
					total	bikes	bikes	bikes
	sales				923,000	267,000	405,000	251,000
	variable manufacturing and selling expense				464,000	120,000	194,000	150,000
	contribution margin (loss)				459,000	147,000	211,000	101,000
	traceable fixed expenses
	advertising				69,900	8,700	40,900	20,300
	depreciation on special equipment				44,200	20,800	7,500	15,900
	salaries of the product line managers				116,200	40,500	39,000	36,700
	total traceable fixed expenses				230,300	70,000	87,400	72,900
	product line segment margin				228,700	77,000	123,600	28,100
	common fixed expenses				184,600
	net operating income(loss)				44,100
2b)	yes