Wednesday, 1 April 2015

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:

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 $ 266,000   $ 406,000   $ 256,000  
  Variable manufacturing and selling expenses   468,000   116,000     200,000     152,000  
 







  Contribution margin   460,000   150,000     206,000     104,000  
 







  Fixed expenses:                
    Advertising, traceable   69,500   8,300     40,300     20,900  
    Depreciation of special equipment   44,000   20,100     7,900     16,000  
    Salaries of product-line managers   114,900   40,700     38,300     35,900  
    Allocated common fixed expenses*   185,600   53,200     81,200     51,200  
 







  Total fixed expenses    414,000   122,300     167,700     124,000  
 







  Net operating income (loss) $ 46,000 $ 27,700   $ 38,300   $ (20,000) 
 
















*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.)
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1b. Should production and sale of the racing bikes be discontinued?
   
  No
 
2a. Prepare a segmented income statement.
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2b.
Would a segmented income statement format be more usable to management in assessing the long-run profitability of the various product lines.
   
  Yes

rev: 05_14_2014_QC_49466, 05_16_2014_QC_49466


Explanation: