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	$	919,000	$	263,000	$	406,000	$	250,000
Variable manufacturing and selling expenses		478,000		119,000		201,000		158,000
Contribution margin		441,000		144,000		205,000		92,000
Fixed expenses:
Advertising, traceable		68,600		8,300		40,100		20,200
Depreciation of special equipment		44,100		20,700		7,500		15,900
Salaries of product-line managers		115,700		40,600		38,700		36,400
Allocated common fixed expenses*		183,800		52,600		81,200		50,000
Total fixed expenses		412,200		122,200		167,500		122,500
Net operating income (loss)	$	28,800	$	21,800	$	37,500	$	(30,500)

*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

CAN YOU PLEASE HELP ME FILL IN THE BLANKS?

Answer 1

1a
	Current Total	Total If Racing Bikes Are Dropped	Difference: NetOperatingIncome
Sales	919000	669000	-250000
Variable manufacturing and selling expenses	478000	320000	158000
Contribution margin (loss)	441000	349000	-92000
Fixed expenses:
Advertising, traceable	68600	48400	20200
Depreciation on special equipment	44100	44100	0
Salaries of product manager	115700	79300	36400
Common allocated costs	183800	183800	0
Total fixed expenses	412200	355600	56600
Net operating income (loss)	28800	-6600	-35400
1b
No
2a
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	919000	263000	406000	250000
Variable manufacturing and selling expenses	478000	119000	201000	158000
Contribution margin (loss)	441000	144000	205000	92000
Traceable fixed expenses:
Advertising, traceable	68600	8300	40100	20200
Depreciation on special equipment	44100	20700	7500	15900
Salaries of product manager	115700	40600	38700	36400
Total traceable fixed expenses	228400	69600	86300	72500
Product line segment margin	212600	74400	118700	19500
Common fixed expenses	183800
Net operating income (loss)	28800
2b
Yes