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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 $ 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

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