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	$	920,000	$	262,000	$	402,000	$	256,000
Variable manufacturing and selling expenses		467,000		114,000		199,000		154,000
Contribution margin		453,000		148,000		203,000		102,000
Fixed expenses:
Advertising, traceable		69,900		8,600		40,700		20,600
Depreciation of special equipment		43,600		20,400		7,800		15,400
Salaries of product-line managers		115,000		40,200		38,700		36,100
Allocated common fixed expenses*		184,000		52,400		80,400		51,200
Total fixed expenses		412,500		121,600		167,600		123,300
Net operating income (loss)	$	40,500	$	26,400	$	35,400	$	(21,300)

*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)
?	?	?	?
?	?	?	?
Contribution margin: (loss)	?	?	?
Fixed expense:	-	-	-
?	?	?	?
?	?	?	?
?	?	?	?
?	?	?	?
Total fixed expenses	?	?	?
Net operating income (loss)	?	?	?

** On the first column insert from the list stated in the bottom with the missing ?**

(sales, variable expenses, advertising traceable , depreciation on special equipment, salaries of product managers, common allocated costs)

  

2a.	Prepare a segmented income statement.

       

	Totals	Dirt Bike	Mountain Bikes	Racing Bikes
?	?	?	?	?
?	?	?	?	?
Contribution margin (loss)	?	?	?	?
Traceable fixed expenses:	-	-	-	-
?	?	?	?	?
?	?	?	?	?
?	?	?	?	?
Total traceable fixed expenses	?	?	?	?
?	?	?	?	?
?	?	-	-	-
Net operating income (loss)	?	-	-	-

** On the first column insert from the list stated in the bottom with the missing ?**

(Sales, Variable manufacturing and selling expenses, Advertising, depreciation of special equipment, salaries of the product line managers, product line segment margin, common fixed expenses)

Answer 1

• Requirements asked: 1A and 2A
• Requirement 1 A

	Current Total	Total if Racing Bikes are dropped	Net Operating Income Increase (Decrease)
Sales	$920,000	$664,000	($256,000)
Variable manufacturing and selling expenses	$467,000	$313,000	$154,000
Contribution margin (loss)	$453,000	$351,000	($102,000)
Fixed expenses:
Advertising, traceable	$69,900	$49,300	$20,600
Depreciation of special equipment	$43,600	$28,200	$15,400
Salaries of product-line managers	$115,000	$78,900	$36,100
Allocated common fixed expenses*	$184,000	$184,000	$0
Total fixed expenses	$412,500	$340,400	$72,100
Net operating income (loss)	$40,500	$10,600	($29,900)

• Requirement 2A

	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	$920,000	$262,000	$402,000	$256,000
Variable manufacturing and selling expenses	$467,000	$114,000	$199,000	$154,000
Contribution margin (loss)	$453,000	$148,000	$203,000	$102,000
Traceable Fixed Expenses:
Advertising, traceable	$69,900	$8,600	$40,700	$20,600
Depreciation of special equipment	$43,600	$20,400	$7,800	$15,400
Salaries of product-line managers	$115,000	$40,200	$38,700	$36,100
Total traceable fixed expenses	$228,500	$69,200	$87,200	$72,100
Segment margin	$224,500	$78,800	$115,800	$29,900
Common Fixed expenses	$184,000
Net operating Income (loss)	$40,500