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	$	927,000	$	267,000	$	404,000	$	256,000
Variable manufacturing and selling expenses		472,000		119,000		201,000		152,000
Contribution margin		455,000		148,000		203,000		104,000
Fixed expenses:
Advertising, traceable		69,600		8,700		40,700		20,200
Depreciation of special equipment		43,400		21,000		7,200		15,200
Salaries of product-line managers		115,000		40,500		38,600		35,900
Allocated common fixed expenses*		185,400		53,400		80,800		51,200
Total fixed expenses		413,400		123,600		167,300		122,500
Net operating income (loss)	$	41,600	$	24,400	$	35,700	$	(18,500)

*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

1a
	Current Total	Total If Racing Bikes Are Dropped	Difference: NetOperatingIncome
Sales	927000	673000	-256000
Variable manufacturing and selling expenses	472000	320000	152000
Contribution margin (loss)	455000	353000	-104000
Fixed expenses:
Advertising, traceable	69600	49400	20200
Depreciation on special equipment	43400	43400	0
Salaries of product manager	115000	79100	35900
Common allocated costs	185400	185400	0
Total fixed expenses	413400	357300	56100
Net operating income (loss)	41600	-4300	-47900
1b
No
2a
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	927000	267000	404000	256000
Variable manufacturing and selling expenses	472000	119000	201000	152000
Contribution margin (loss)	455000	148000	203000	104000
Traceable fixed expenses:
Advertising, traceable	69600	8700	40700	20200
Depreciation on special equipment	43400	21000	7200	15200
Salaries of product manager	115000	40500	38600	35900
Total traceable fixed expenses	228000	70200	86500	71300
Product line segment margin	227000	77800	116500	32700
Common fixed expenses	185400
Net operating income (loss)	41600
2b
Yes