ezto The Regal Cycle Company manufactures three types of bic

ezto The Regal Cycle Company manufactures three types of bicycles-a dirt bike, a mountain bike, and a racing bike. Da?a on sales and expenses for the past quarter follow Mountain Bikes Total Bikes Bikes Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses 925,000 $ 261,000 S 407,000 $257,000 464,000 114,000 193,000 157,000 461,000 147,000 214,000 100,000 Advertising traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses 69,2008,80040,30020,100 7,400 15,200 14,900 40,10038,200 36,600 185,000 52,200 81,400 51,400 43.20020,600 12.300 121,700 167,300 123,300 S 48,700 S 25,300 46,700 (23,300) Total fixed expenses Net operating income (loss) 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 lne 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 oparating Income by dscontinuing racing bakes? (Decreases should be indicated by a minus sign.) Difference: Net Operating Income Total It Racing Bikes Are roppe Current Total Increase or Contribution margin (loss) Ficed expenses Total ficed expenses Net operating income (loss) 1b Should production and sale of the racing bikes be discontinued? O Yes ?No

Solution

Incremental Analysis TOTAL Discontinue Net Increase/(Decrease) AMOUNT $ AMOUNT $ AMOUNT $ Sales Revenue 925,000 668,000 -257,000 Less: Variable cost 464,000 307,000 157,000 Contribution margin 461,000 361,000 -100,000 Less: Fixed cost Advertisement 69,200 49,100 20,100 Depreciation 43,200 43,200 0 Salary of product line manager 114,900 78,300 36,600 Common Fixed cost 185,000 185,000 0 SEGMENT MARGIN 48,700 5,400 -43,300 No, Racing Rike Division Shall not be Discontinued SEGMENT-WISE INCOME STATEMENT TOTAL Dirt Mountain Racing AMOUNT $ AMOUNT $ AMOUNT $ AMOUNT $ Sales Revenue 925,000 261,000 407,000 257,000 Less: Variable cost 464,000 114,000 193,000 157,000 Contribution margin 461,000 147,000 214,000 100,000 Less: Traceable Expense Advertisement 69,200 8,800 40,300 20,100 Depreciation 43,200 20,600 7,400 15,200 Salary of product line manager 114,900 40,100 38,200 36,600 Total Traecable expense 227,300 69,500 85,900 71,900 SEGMENT MARGIN 233,700 77,500 128,100 28,100 Less: Common Fixed expesne 185,000 Net Operating Income 48,700