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.)   1b. Should production and sale of the racing bikes be discontinued?       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 rev: 05_14_2014_QC_49466, 05_16_2014_QC_49466 Explanation: 1. No, production and sale of the racing bikes should not be discontinued. If the racing bikes were discontinued, then the net operating income for the company as a whole would decrease by $(31,200) each quarter:         Lost contribution margin   $(104,000)         Fixed costs that can be avoided:       Advertising, traceable $16,000       Salary of the product line manager $35,900   72,800     Decrease in net operating income for the company as a whole   $(31,200)          The depreciation of the special equipment is a sunk cost and is not relevant to the decision. The common costs are allocated and will continue regardless of whether or not the racing bikes are discontinued; thus, they are not relevant to the decision. Alternative Solution:     Current Total   Total If Racing Bikes Are Dropped Difference: Net Operating Income Increase or (Decrease)   Sales $ 928,000   $ 672,000    $ (256,000)     Variable expenses   468,000     316,000      152,000        Contribution margin   460,000     356,000      (104,000)       Fixed expenses:                 Advertising, traceable   69,500     48,600      20,900        Depreciation on special equipment*   44,000     44,000              Salaries of product managers   114,900     79,000      35,900        Common allocated costs   185,600     185,600      0        Total fixed expenses    414,000     362,100      72,800        Net operating income $ 46,000   $ (6,100)    $ (31,200)     *Includes pro-rated loss on the special equipment if it is disposed of. 2. The segmented report can be improved by eliminating the allocation of the common fixed expenses. Following the format introduced in Chapter 12 for a segmented income statement, a better report would be:     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       Traceable fixed expenses:                     Advertising   69,500     8,300     40,300     20,900       Depreciation of special equipment   44,000     20,100     7,900     16,000       Salaries of the product line managers   114,900     40,700     38,300     35,900       Total traceable fixed expenses    228,400     69,100     86,500     72,800       Product line segment margin   231,600   $ 80,900   $ 119,500   $ 31,200           Common fixed expenses   185,600                               Net operating income $ 46,000