The Regal Cycle Company manufactures dirt bikes, mountain bikes, and racing bikes. Data on sales...

Question:

The Regal Cycle Company manufactures dirt bikes, mountain bikes, and racing bikes. Data on sales and expenses for the past quarter follow:

Total Dirt Bikes Mountain Bikes Racing Bikes
Sales $ 926,000 $ 269,000 $ 405,000 $ 252,000
Variable manufacturing and selling expenses 478,000 116,000 203,000 159,000
Contribution margin 448,000 153,000 202,000 93,000
Fixed expenses:
  Advertising, traceable 70,800 8,900 40,900 21,000
  Depreciation of special equipment 43,800 21,000 7,600 15,200
  Salaries of product-line managers 115,800 40,900 38,300 36,600
  Allocated common fixed expenses* 185,200 53,800 81,000 50,400
Total fixed expenses 415,600 124,600 167,800 123,200
Net operating income (loss) $ 32,400 $ 28,400 $ 34,200 $ (30,200)

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) $                    $                $                 

  • Allocated on the basis of sales dollars.

1b. Should production and sale of the racing bikes be discontinued, yes or no?

2a. Prepare a segmented income statement

Total Dirt Bikes Mountain Bikes Racing Bikes
                                                                                                                                                           
                                                                                                                                 
Contribution margin (loss)                                                                                    
Traceable fixed expenses:
                                                                                                                                   
                                                                                                                     
                                                                                                                     
Total traceable fixed expenses                                                                    
                                                                                                         
                                                                
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 or no?

Answer and Explanation:


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