The Regal Cycle Company manufactures three types of bicycles

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 Bikes 925,000 $270,000 $ 401,000$ 254,000 471,000 113,000 207,000 151,000 Variable manufacturing and seling expenses Contribution margin Fixed expenses 454,000 157.000 194,000 103,000 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fxed expenses 69.400 8.200 40,700 20,500 44,000 20,700 7,600 15,700 114,100 40.200 38,600 35,300 185,000 54,000 80200 50,800 Total fixed expenses 412,500 123,100 167,100 12,300 Net operatng income loss) s 41,500 33,900 26,900(19,300) Alocated on the basis of sales dolars. Management is concemed about the continued losses shown by the racing bkes and wants a recommendaton 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 wer out Required: ta. What is the impact on net operating income by discontinuing racing bikes? (Decreases should be ndicated by a minus sign) Operating Income Current Total Total I Racing Bikes Are Dropped (Decrease) Contribution margin (loss) Fixed expenses Total txed expenses Net operating income (loss) 1b. Should production and sale of the racing bikes be disconänued? 2a. Prepare a segmented income statement Contribution marginloss) fxed expenses

Solution

1a Current Total Total If Racing Bikes Are Dropped Difference: Net Operating Income Increase or (Decrease) Sales $       925,000 $               671,000 $                    (254,000) Less variable expenses           471,000                   320,000                         151,000 Contribution margin           454,000                   351,000                        (103,000) Less fixed expenses: Advertising, traceable             69,400                     48,900                           20,500 Depreciation on special equipment*             44,000                     44,000                                   -   Salaries of product managers           114,100                     78,800                           35,300 Common allocated costs           185,000                   185,000                                   -   Total fixed expenses           412,500                   356,700                           55,800 Net operating income $         41,500                     (5,700)                          (47,200) *Includes pro-rated loss on the special equipment if it is disposed of. 1b No, it will reduce Net operating income by $47,200 if dropped. 2a Total Dirt Bikes Mountain Bikes Racing Bikes Sales $       925,000 $               270,000 $                     401,000 $      254,000 Less Variable manufacturing and selling expenses           471,000                   113,000                         207,000          151,000 Contribution Margin (loss) $       454,000 $               157,000 $                     194,000 $      103,000 Less Traceable fixed expenses: Advertising             69,400                       8,200                           40,700            20,500 Depreciation on special equipment             44,000                     20,700                             7,600            15,700 Salaries of product line managers           114,100                     40,200                           38,600            35,300 Total traceable fixed expenses           227,500                     69,100                           86,900            71,500 Product line segment margin $       226,500 $                 87,900 $                     107,100 $        31,500 Less: Common fixed expenses           185,000 Net operating income             41,500 2b Yes, it clearly shows that all the segments contributing towards profit and reduction in any line will decrease its Net operating Income.