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	$	923,000	$	266,000	$	401,000	$	256,000
Variable manufacturing and selling expenses		472,000		112,000		208,000		152,000
Contribution margin		451,000		154,000		193,000		104,000
Fixed expenses:
Advertising, traceable		69,800		8,600		40,600		20,600
Depreciation of special equipment		44,000		20,700		7,700		15,600
Salaries of product-line managers		114,600		40,100		38,400		36,100
Allocated common fixed expenses*		184,600		53,200		80,200		51,200
Total fixed expenses		413,000		122,600		166,900		123,500
Net operating income (loss)	$	38,000	$	31,400	$	26,100	$	(19,500)

*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

Answer 1