Question

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	$	924,000	$	267,000	$	401,000	$	256,000
Variable manufacturing and selling expenses		468,000		118,000		199,000		151,000
Contribution margin		456,000		149,000		202,000		105,000
Fixed expenses:
Advertising, traceable		69,900		8,900		40,400		20,600
Depreciation of special equipment		43,100		20,400		7,500		15,200
Salaries of product-line managers		114,800		40,100		38,400		36,300
Allocated common fixed expenses*		184,800		53,400		80,200		51,200
Total fixed expenses		412,600		122,800		166,500		123,300
Net operating income (loss)	$	43,400	$	26,200	$	35,500	$	(18,300)

*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.)

	Current Total	Total If Racing Bikes Are Dropped	Difference: Net Operating Income Increase or (Decrease)
Sales	$924,000
Variable manufacturing and selling expenses	468,000
Contribution margin (loss)	456,000	0	(456,000)
Fixed expenses:
Advertising, traceable	69,900
Depreciation on special equipment	43,100
Salaries of product managers	114,800
Common allocated costs	184,800
Total fixed expenses	412,600	0	0
Net operating income (loss)	$43,400	$0	$(456,000)

Answer 1

	Current Total	Total if racing bikes are dropped	Difference: Net operating income increase or (decrease)
Sales	$       9,24,000	$ 6,68,000	$ -2,56,000
Variable manufacturing and selling expenses	$       4,68,000	$ 3,17,000	$ 1,51,000
Contribution margin (loss)	$       4,56,000	$ 3,51,000	$ -1,05,000
Fixed expenses:
Advertising, traceable	$           69,900	$ 49,300	$ 20,600
Depreciation on special equipment	$           43,100	$ 43,100	$ 0
Salaries of product managers	$       1,14,800	$ 78,500	$ 36,300
Common allocated costs	$       1,84,800	$ 1,84,800	$ 0
Total fixed expenses	$       4,12,600	$ 3,55,700	$ 56,900
Net operating income (loss)	$           43,400	$ -4,700	$ -48,100