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: Dirt Mountain Racing Total Bikes Bikes Bikes $ 922,000 $264,000 $ 405,000 $ 253,000 463,000 110,000 195,000 158,000 459,000 154,000 210,000 95,000 Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* Total fixed expenses Net operating income (loss) 69,400 8,400 40,300 20,700 43,300 20,300 7,200 15,800 115,400 40,700 38,700 36,000 184,400 52,800 81,000 50,600 412,500 122,200 167,200 123,100 $ 46,500 $ 31,800 $ 42,800 $(28,100) *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.

Answer 1

1		Current Total	Total if racing bikes are dropped	Difference: Net operating income increase or (decrease)
	Sales	$       9,22,000	$       6,69,000	$     -2,53,000
	Variable manufacturing and selling expenses	$       4,63,000	$       3,05,000	$       1,58,000
	Contribution margin (loss)	$       4,59,000	$       3,64,000	$         -95,000
	Fixed expenses:
	Advertising, traceable	$           69,400	$           48,700	$           20,700
	Depreciation on special equipment	$           43,300	$           43,300	$                    -
	Salaries of product managers	$       1,15,400	$           79,400	$           36,000
	Allocated common expense	$       1,84,400	$       1,84,400	$                    -
	Total fixed expenses	$       4,12,500	$       3,55,800	$           56,700
	Net operating income (loss)	$           46,500	$             8,200	$         -38,300
2	No
	Discontinuation of Production and sale of racing bikes will incur more loss than existing loss from the unit
3		Total	Dirt Bikes	Mountain Bikes	Racing Bikes
	Sales	$       9,22,000	$       2,64,000	$       4,05,000	$       2,53,000
	Variable manufacturing and selling expenses	$       4,63,000	$       1,10,000	$       1,95,000	$       1,58,000
	Contribution margin (loss)	$       4,59,000	$       1,54,000	$       2,10,000	$           95,000
	Traceable Fixed expenses:
	Advertising, traceable	$           69,400	$             8,400	$           40,300	$           20,700
	Depreciation on special equipment	$           43,300	$           20,300	$             7,200	$           15,800
	Salaries of product managers	$       1,15,400	$           40,700	$           38,700	$           36,000
	Total traceable fixed expenses	$       2,28,100	$           69,400	$           86,200	$           72,500
	Product line segment margin (loss)	$       2,30,900	$           84,600	$       1,23,800	$           22,500
	Allocated common fixed expense	$       1,84,400
	Net operating income (loss)	$           46,500