EXERCISE 132 Dropping or Retaining a Segment L02 The Regal C

EXERCISE 13-2 Dropping or Retaining a Segment (L02] 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: Dirt Bikes Mountain Bikes Racing Bikes Total $300,000 $90,000 $150,000 $60,000 33,000 27,000 Sales Variable manufacturing 60,000 90,000 14,000 9,000 13,000 30,000 66,000 and selling expenses ...120,000 27,000 63,000 Fixed expenses: 6,000 8,000 10,000 12,000 36,000 Net operating income (oss)..32.000 17.000 24.000 $(9.000 30,000 23,000 35,000 60,000 10,000 6,000 12,000 18,000 46,000 Depreciation of speciat Salaries of product-line Allocated common fixed expanses. Allocated on the basis of sales doliars.

Solution

Current Total Total If Racing Bikes Are Dropped Difference: Net Operating Income Increase or (Decrease) Sales $             300,000 $      240,000 $                (60,000) Less variable expenses                 120,000            87,000                      33,000 Contribution margin                 180,000          153,000                    (27,000) Less fixed expenses: Advertising, traceable                   30,000            24,000                        6,000 Depreciation on special equipment*                   23,000            23,000                             -   Salaries of product managers                   35,000            25,000                      10,000 Common allocated costs                   60,000            60,000                             -   Total fixed expenses                 148,000          132,000                      16,000 Net operating income $               32,000            21,000                    (11,000) *Includes pro-rated loss on the special equipment if it is disposed of. If production and sales of racing bikes is stopped, then company will lose $11000 in Net operating Income.