In: Accounting
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? | ||||
|
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. |
||||
|