Question

In: Accounting

The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a mountain bike, and a...

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 $ 915,000 $ 262,000 $ 400,000   $ 253,000  
  Variable manufacturing and selling expenses 471,000 111,000 201,000   159,000  
  Contribution margin 444,000 151,000 199,000 94,000  
  Fixed expenses:
    Advertising, traceable 70,300 8,900 40,500 20,900
    Depreciation of special equipment 43,600 20,800 7,600 15,200  
    Salaries of product-line managers 115,200 40,300 38,200 36,700  
    Allocated common fixed expenses* 183,000 52,400 80,000 50,600  
  Total fixed expenses 412,100 122,400 166,300 123,400  
  Net operating income (loss) $ 31,900 $ 28,600   $ 32,700 $ (29,400)
*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.)

       

1b. Should production and sale of the racing bikes be discontinued?
Yes
No

  

2a. Prepare a segmented income statement.

        

2b.

Would a segmented income statement format be more usable to management in assessing the long-run profitability of the various product lines.

Yes
No

Solutions

Expert Solution

1-a. Impact on income on discontinuing racing bikes will be as follows:

Sales

$253,000

Variable manufacturing and selling expenses

159,000  

Contribution margin

94,000  

Avoidable Fixed Expenses:

    Advertising, traceable

20,900

    Salaries of product-line managers

36,700  

  Total avoidable fixed expenses

57,600

Net Operating Income/(Loss)

36,400

Net operating income will reduce by $36,400 on discontinuing racing bikes

i.e. Net Impact = -$36,400

Note: Depreciation is a sunk cost and hence irrelevant

1b. No, since decrease in income

2-a Segmented Income Statement:

Dirt Bikes

Mountain Bikes

Racing Bikes

Total

Sales

262,000

400,000  

253,000  

915,000

  Variable manufacturing and selling expenses

111,000

201,000  

159,000  

471,000

  Contribution margin

151,000

199,000

94,000  

444,000

Avoidable Fixed Expenses:

    Advertising, traceable

8,900

40,500

20,900

70,300

Depreciation

20,800

7,600

15,200  

43,600

    Salaries of product-line managers

40,300

38,200

36,700  

115,200

Net Operating Income/(Loss)

81,000

112,700

21,200

214,900

Common Fixed Expenses

183,000

Net Profit

31,900

2b Yes, since it reflects true position


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