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 Bikes $ 267,000 120,000 Total $ 923,000 464,000 Mountain Bikes $ 405,000 194,000 Racing Bikes $ 251,000 150,000 Sales Variable manufacturing and selling expenses Contribution margin 459,000 147,000 211,000 101,000 Fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses 69,900 44,200 116,200 184,600 8,700 20,800 40,500 53,400 40,900 7,500 39,000 81,000 20,300 15,900 36,700 50,200 Total fixed expenses 414,900 123,400 168,400 123,100 Net operating income (loss) $ 44,100 $ 23,600 $ 42,600 $ (22,100) *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: la. 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) Fixed expenses: Total fixed expenses Net operating income (loss) 0 0 $ 0 $

Answer 1

1		Current Total	Total if racing bikes are dropped	Difference: Net operating income increase or (decrease)
	Sales	$       9,23,000	$       6,72,000	$     -2,51,000
	Variable manufacturing and selling expenses	$       4,64,000	$       3,14,000	$       1,50,000
	Contribution margin (loss)	$       4,59,000	$       3,58,000	$     -1,01,000
	Fixed expenses:
	Advertising, traceable	$           69,900	$           49,600	$           20,300
	Depreciation on special equipment	$           44,200	$           44,200	$                    -
	Salaries of product managers	$       1,16,200	$           79,500	$           36,700
	Allocated common expense	$       1,84,600	$       1,84,600	$                    -
	Total fixed expenses	$       4,14,900	$       3,57,900	$           57,000
	Net operating income (loss)	$           44,100	$                 100	$         -44,000
	No
	Discontinuation of Production and sale of racing bikes will incur more loss than existing loss from the unit
2		Total	Dirt Bikes	Mountain Bikes	Racing Bikes
	Sales	$       9,23,000	$       2,67,000	$       4,05,000	$       2,51,000
	Variable manufacturing and selling expenses	$       4,64,000	$       1,20,000	$       1,94,000	$       1,50,000
	Contribution margin (loss)	$       4,59,000	$       1,47,000	$       2,11,000	$       1,01,000
	Traceable Fixed expenses:
	Advertising, traceable	$           69,900	$             8,700	$           40,900	$           20,300
	Depreciation on special equipment	$           44,200	$           20,800	$             7,500	$           15,900
	Salaries of product managers	$       1,16,200	$           40,500	$           39,000	$           36,700
	Total traceable fixed expenses	$       2,30,300	$           70,000	$           87,400	$           72,900
	Product line segment margin (loss)	$       2,28,700	$           77,000	$       1,23,600	$           28,100
	Allocated common fixed expense	$       1,84,600
	Net operating income (loss)	$           44,100
	Yes