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: Total Dirt Bikes Mountain Bikes Racing Bikes   Sales $ 926,000 $ 261,000 $ 410,000   $ 255,000     Variable manufacturing and selling expenses 464,000 115,000 199,000   150,000     Contribution margin 462,000 146,000 211,000 105,000     Fixed expenses:     Advertising, traceable 69,000 8,200 40,300 20,500     Depreciation of special equipment 43,700 20,900 7,100 15,700       Salaries of product-line managers 114,400 40,600 38,600 35,200       Allocated common fixed expenses* 185,200 52,200 82,000 51,000     Total fixed expenses 412,300 121,900 168,000 122,400     Net operating income (loss) $ 49,700 $ 24,100   $ 43,000 $ (17,400) *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) Should production and sale of the racing bikes be discontinued? Yes No Prepare a segmented income statement. totals Dirt bike Mountain bikes Racing bikes Contribution margin (loss) Fixed expenses: Total traceable fixed expenses Net operating income (loss) Would a segmented income statement format be more usable to management in assessing the long-run profitability of the various product lines. Yes No

Answer 1

(1a)

	Current Total	Total if Racing Bikes are Dropped	Diferrence Increase/(Decrease)
Sales	926000	671000	(255000)
Variable mfr & Selling Exp	464000	314000	150000
Contribution Margin (Loss)	462000	357000	(105000)
Fixed Exp :
Advertising, traceable	69000	48500	20500
Depreciation on special equipment	43700	43700	-
Salaries of product managers	114400	79200	35200
Common allocated costs	185200	185200	-
Total Fixed Exp	412300	356600	55700
Net Operating Income (Loss)	49700	400	(49300)

(1b) No, production & sale of the racing bikes should not be discontinued

(2a)

	Totals	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	926000	261000	410000	255000
Variable Mfr & Selling Exp	464000	115000	199000	150000
Contribution Margin (Loss)	462000	146000	211000	105000
Traceable Fixed Exp :
Advertising, Traceable	69000	8200	40300	20500
Depreciation of special equipment	43700	20900	7100	15700
Salaries of Product line managers	114400	40600	38600	35200
Total traceable fixed exp	227100	69700	86000	71400
Product line segment margin	234900	76300	125000	33600
Common fixed exp	185200
Net Operating Income (Loss)	49700

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