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	$	920,000	$	261,000	$	409,000	$	250,000
Variable manufacturing and selling expenses		478,000		120,000		208,000		150,000
Contribution margin		442,000		141,000		201,000		100,000
Fixed expenses:
Advertising, traceable		69,900		8,100		40,800		21,000
Depreciation of special equipment		43,400		21,000		7,200		15,200
Salaries of product-line managers		115,300		40,800		38,100		36,400
Allocated common fixed expenses*		184,000		52,200		81,800		50,000
Total fixed expenses		412,600		122,100		167,900		122,600
Net operating income (loss)	$	29,400	$	18,900	$	33,100	$	(22,600)

*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	920000	670000	-250000
Variable manufacturing and selling expenses	478000	328000	150000
Contribution margin (loss)	442000	342000	-100000
Fixed expenses:
Advertising, traceable	69900	48900	21000
Depreciation on special equipment	43400	43400	0
Salaries of product manager	115300	78900	36400
Common allocated costs	184000	184000	0
Total fixed expenses	412600	355200	57400
Net operating income (loss)	29400	-13200	-42600
1b
No
2a
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	920000	261000	409000	250000
Variable manufacturing and selling expenses	478000	120000	208000	150000
Contribution margin (loss)	442000	141000	201000	100000
Traceable fixed expenses:
Advertising, traceable	69900	8100	40800	21000
Depreciation on special equipment	43400	21000	7200	15200
Salaries of product manager	115300	40800	38100	36400
Total traceable fixed expenses	228600	69900	86100	72600
Product line segment margin	213400	71100	114900	27400
Common fixed expenses	184000
Net operating income (loss)	29400
2b
Yes