Question

1. value: 1.25 points 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 Bikes $262,000 113,000 Total $ 921,000 455,000 Mountain Bikes $ 407,000 192,000 Racing Bikes $ 252,000 150,000 Sales Variable manufacturing and selling expenses Contribution margin 466,000 149,000 215,000 102,000 7700 Fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses 70,600 44,600 113,700 184,200 8,900 20,900 40,100 52,400 40,900 7,700 38,500 81,400 20,800 16,000 35,100 50,400 Total fixed expenses 413,100 122,300 168,500 122,300 Net operating income (loss) $ 52,900 $ 26,700 $ 46,500 $ (20,300) *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) Fixed expenses: Total fixed expenses Net operating income (loss)

Answer 1

la) Impact on Net Operating income if Racing bikes are dis-continuted Difference Net Operating Total if racing Particulars Current Total Income bikes dropped Increase/ (Decrease) Sales (252,000) 921,000 669,000 Less: Variable manufacturing and selling expense 455,000 305,000 (150,000) Contribution margin 466,000 364,000 (102,000) Less: Fixed expenses Advertising, traceable 70,600 49,800 (20,800) Depreciation on special equipment 44,600 44,600 Salaries of product managers (35,100) 113,700 78,600 Common allocated costs 184,200 184,200 Total Fixed expenses 413,100 357,200 (55,900) Net Operating Income/(Loss) 52,900 6,800 (46,100) 1b) No, since the on dropping racing bikes Total Net Operating income is decreased to S 6,800 from S 52,900/. 2a) Segmented Income Statement :- Mountain Racing Particulars Dirt Bikes Totals Bikes Bikes Sales 262,000 407,000 921,000 252,000 Less: Variable manufacturing and selling expense 113,000 455,000 192,000 150,000 Contribution margin 466,000 149,000 215,000 102,000 Less: Traceable fixed expenses Advertising, traceable 40,900 70,600 8,900 20,800 Depreciation on special equipment 44,600 20,900 7,700 16,000 Salaries of product managers 35,100 113,700 40,100 38,500 Total Traceable fixed expenses 87,100 228,900 69,900 71,900 Product Line Segment Margin 237,100 79,100 127,900 30,100 Less: Common fixed expenses 52,400 50,400 184,200 81,400 Net Operating Income/(Loss) 52,900 26,700 46,500 (20,300) 2b) Yes, It would be more useful to management in assessing the long-run profitabiliity of the various product lines.