Question

Exercise 10-2 Dropping or Retaining a Segment [LO10-2]

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	$	928,000	$	262,000	$	407,000	$	259,000
Variable manufacturing and selling expenses		468,000		119,000		193,000		156,000
Contribution margin		460,000		143,000		214,000		103,000
Fixed expenses:
Advertising, traceable		69,900		8,500		40,900		20,500
Depreciation of special equipment		43,900		20,500		7,800		15,600
Salaries of product-line managers		115,900		40,500		38,500		36,900
Allocated common fixed expenses*		185,600		52,400		81,400		51,800
Total fixed expenses		415,300		121,900		168,600		124,800
Net operating income (loss)	$	44,700	$	21,100	$	45,400	$	(21,800)

*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.) HOME ACCESSIBILITY PREVIEW Current Total Total If Racing Bikes Are Dropped Difference: Net Operating Income Increase or (Decrease) Sales $928,000 $669,000 Contribution margin (loss) 928,000 669,000 0 Fixed expenses: Advertising, traceable 69,900 49,400 Depreciation on special equipment 43,900 43,900 Salaries of product managers 115,900 79,000 Common allocated costs 185,600 185,600 Total fixed expenses 415,300 357,900 0 Net operating income (loss) $512,700 $311,100 $0 + 1b. Should production and sale of the racing bikes be discontinued? yes or no? 2a. Prepare a segmented income statement. HOME ACCESSIBILITY PREVIEW Totals Dirt Bikes Mountain Bikes Racing Bikes Contribution margin (loss) 0 0 0 0 Traceable fixed expenses: Total traceable fixed expenses 0 0 0 0 0 $0 $0 $0 Net operating income (loss) $0 + 2b. Would a segmented income statement format be more usable to management in assessing the long-run profitability of the various product lines. yes or no?

Answer 1

1a
	Current Total	Total If Racing Bikes Are Dropped	Difference: NetOperatingIncome
Sales	928000	669000	-259000
Variable manufacturing and selling expenses	468000	312000	156000
Contribution margin (loss)	460000	357000	-103000
Fixed expenses:
Advertising, traceable	69900	49400	20500
Depreciation on special equipment	43900	43900	0
Salaries of product manager	115900	79000	36900
Common allocated costs	185600	183800	1800
Total fixed expenses	415300	356100	59200
Net operating income (loss)	44700	900	-43800
1b
No
2a
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	928000	262000	407000	259000
Variable manufacturing and selling expenses	468000	119000	193000	156000
Contribution margin (loss)	460000	143000	214000	103000
Traceable fixed expenses:
Advertising, traceable	69900	8500	40900	20500
Depreciation on special equipment	43900	20500	7800	15600
Salaries of product manager	115900	40500	38500	36900
Total traceable fixed expenses	229700	69500	87200	73000
Product line segment margin	230300	73500	126800	30000
Common fixed expenses	185600
Net operating income (loss)	44700
2b
Yes