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: Dirt Mountain Total Bikes Bikes $ 931,000 $264,000 $ 410,000 457,000 111,000 196,000 474,000 153,000 214,000 Racing Bikes $ 257,000 150,000 107,000 Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* Total fixed expenses Net operating income (loss) 70, 100 8,900 43,800 20,800 115,200 40,800 186,200 52,800 415,300 123,300 58,700 $ 29,700 $ 40,300 20,900 7,600 15,400 38,900 35,500 82,000 51,400 168,800 123,200 45,200 $(16,200) $ *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.

Answer 1

1		Current Total	Total if racing bikes are dropped	Difference: Net operating income increase or (decrease)
	Sales	$       9,31,000	$       6,74,000	$     -2,57,000
	Variable manufacturing and selling expenses	$       4,57,000	$       3,07,000	$       1,50,000
	Contribution margin (loss)	$       4,74,000	$       3,67,000	$     -1,07,000
	Fixed expenses:
	Advertising, traceable	$           70,100	$           49,200	$           20,900
	Depreciation on special equipment	$           43,800	$           43,800	$                    -
	Salaries of product managers	$       1,15,200	$           79,700	$           35,500
	Allocated common expense	$       1,86,200	$       1,86,200	$                    -
	Total fixed expenses	$       4,15,300	$       3,58,900	$           56,400
	Net operating income (loss)	$           58,700	$             8,100	$         -50,600
2	No
	Discontinuation of Production and sale of racing bikes will incur more loss than existing loss from the unit
3		Total	Dirt Bikes	Mountain Bikes	Racing Bikes
	Sales	$       9,31,000	$       2,64,000	$       4,10,000	$       2,57,000
	Variable manufacturing and selling expenses	$       4,57,000	$       1,11,000	$       1,96,000	$       1,50,000
	Contribution margin (loss)	$       4,74,000	$       1,53,000	$       2,14,000	$       1,07,000
	Traceable Fixed expenses:
	Advertising, traceable	$           70,100	$             8,900	$           40,300	$           20,900
	Depreciation on special equipment	$           43,800	$           20,800	$             7,600	$           15,400
	Salaries of product managers	$       1,15,200	$           40,800	$           38,900	$           35,500
	Total traceable fixed expenses	$       2,29,100	$           70,500	$           86,800	$           71,800
	Product line segment margin (loss)	$       2,44,900	$           82,500	$       1,27,200	$           35,200
	Allocated common fixed expense	$       1,86,200
	Net operating income (loss)	$           58,700

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