| 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 | $ | 935,000 | $ | 269,000 | $ | 408,000 | $ | 258,000 |
| Variable manufacturing and selling expenses | 455,000 | 111,000 | 192,000 | 152,000 | ||||
| Contribution margin | 480,000 | 158,000 | 216,000 | 106,000 | ||||
| Fixed expenses: | ||||||||
| Advertising, traceable | 69,800 | 8,400 | 40,600 | 20,800 | ||||
| Depreciation of special equipment | 44,000 | 20,200 | 7,900 | 15,900 | ||||
| Salaries of product-line managers | 115,200 | 40,500 | 38,000 | 36,700 | ||||
| Allocated common fixed expenses* | 187,000 | 53,800 | 81,600 | 51,600 | ||||
| Total fixed expenses | 416,000 | 122,900 | 168,100 | 125,000 | ||||
| Net operating income (loss) | $ | 64,000 | $ | 35,100 | $ | 47,900 | $ | (19,000) |
What is the impact on net operating income by discontinuing racing bike
Answer
1
What is the impact on net operating income by discontinuing racing bikes
| Decrease in net operating income $ | -48500 |
If discontinuing racing bike then net income would be decrease by $ 48,500
Working notes for the above answer is as under
| Lost Contribution margin | -106000 |
| Fixed costs that can be avoided: | |
| Advertising, traceable | 20800 |
| Salary of the product line manager | 36700 |
| Decrease in net operating income for the company as a whole |
-48500 |
2
Should production and sale of the racing bikes be discontinued?
Answer: NO
Reason : If discontinuing racing bike then net income would be decrease by $ 48,500 so it is better to continue with it
2a
Prepare a segmented income statement.
| Totals | Dirt Bikes | Mountain Bikes | Racing Bikes | |
| Contribution margin (loss) | 480000 | 15800 | 216000 | 106000 |
| Traceable fixed expenses: | ||||
| Advertising, traceable | 69800 | 8400 | 40600 | 20800 |
| Salaries of product-line managers | 115200 | 40500 | 38000 | 36700 |
| Depreciation of special equipment | 44000 | 20200 | 7900 | 15900 |
| Total traceable fixed expenses | 229000 | 69100 | 86500 | 73400 |
| Net operating income (loss) | 251000 | -53300 | 129500 | 32600 |
| Less common Fixed Cost | 187000 | |||
| Net operating income (loss) | 64000 |
2B
Would a segmented income statement format be more usable to management in assessing the long-run profitability of the various product lines.
Answer: Yes
