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 Total 931.000 473.000 450.000 Bikes S282.000 114.000 148,000 Mountain Bikes $ 409.000 208.000 203.000 Racing Bikes S280,000 153,000 107.000 Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of product line managers Allocated common foed expenses Total fixed expenses Net operating income (loss) 40.700 7.700 70.000 43.300 113.700 186,200 38.000 9.000 20.100 40.300 52.400 121,800 26,200 81.800 20,300 15,500 35.400 52.000 123,200 S (18.200) 413,200 44.800 168,200 $ 34,800 $ S *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) o Food expenses: Total fixed expenses Net operating income (loss) 0 0 0 0 0 0 $ $ $ 1b. Should production and sale of the racing bikes be discontinued? O Yes No 2a. Prepare a segmented income statement. Totals Dirt Bikes Mountain Bikes Racing Bikes ol Contribution margin (loss) Traceable fixed expenses: Total traceable fixed expenses 0 0 TOS 0 1 os os Net operating income (loss) 2b. Would a segmented income statement format be more usable to management in assessing the long-run profitability of the various product lines. Yes O No

Answer 1

1a.

	Current total	Total if racing bikes are dropped	Difference: Net operating income increase or (decrease)
Sales	$931,000	$671,000	$(260,000)
Variable manufacturing and selling expense	473,000	320,000	153,000
Contribution margin	458,000	351,000	(107,000)
Fixed expenses:
Advertising, traceable	70,000	49,700	20,300
Depreciation of special equipment	43,300	43,300	0
Salaries of product line managers	113,700	78,300	35,400
Allocated common fixed expenses	186,200	186,200	0
Total fixed expenses	413,200	357,500	55,700
Net operating income (loss)	$44,800	$(6,500)	$(51,300)

1b.

No, production and sale of racing bikes should not be discontinued.

2a.

	Totals	Dirt bikes	Mountain bikes	Racing bikes
Sales	$931,000	$262,000	$409,000	$260,000
Variable manufacturing and selling expenses	473,000	114,000	206,000	153,000
Contribution margin	458,000	148,000	203,000	107,000
Traceable fixed expenses:
Advertising	70,000	9,000	40,700	20,300
Depreciation of special equipment	43,300	20,100	7,700	15,500
Salaries of product line managers	113,700	40,300	38,000	35,400
Total traceable fixed expenses	227,000	69,400	86,400	71,200
Segmented product line margin	231,000	78,600	116,600	35,800
Common fixed expenses	186,200
Net operating income (loss)	$44,800

2b. Yes, the segmented income statement format will be more usable to management in assessing the long-run profitability of various product lines.