Question

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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 Bikes $ 268,000 120,000 Total $ 931,000 470,000 Mountain Bikes $ 409,000 197,000 Racing Bikes $ 254,000 153,000 Sales Variable manufacturing and selling expenses Contribution margin 461,000 148,000 212,000 101,000 Fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses 70.200 43,400 115,400 186,200 8,600 20,800 40,800 53,600 40,900 7,400 38,000 81,800 20,700 15,200 36,600 50,800 Total fixed expenses 415,200 $ 45,800 123,800 $ 24,200 168,100 $ 43,900 123,300 $ (22,300) Net operating income (loss) *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 expenses: Total fixed expenses Net operating income (loss) ON S OLS

Answer 1

Current Total Total it Racing bikes Ore dropped Difference: Netoperating income Increase (Denone) Sales $ 931000 $677000 -$254000 Variable cost 470000 317000 153000 a Contribution margin Closs) 461000 360000 - 101000 Fixed Expenses. Advertising 70200 49500 20700 43400 43400 Depreciation salaries 115400 78800 36600 Allocated common fixed Expenes 186200 186200 357900 415200 57300 b) Total fixed Expenses $ 45800 $ 2100 - $43700 Net Operating income (a-b)

20 Segmented income statement Totals Dirt Bikes Thountain Bikes Racing Bikes sales $ 931000 $268000 $409000 $254000 Variable cost 470000 153000 120000 197000 461000 148000 212000 101000 400 70 200 40900 20700 7400 15200 20800 43400 38000 36600 40800 115 400 a) contribution Margin (low) Traceable fixed Expenses: Advertising Depreciation salaries brotal traceable fixed Expenses controllable margin Ca-b) Allocated fixed Expene Net operating income 229000 70200 86300 72500 232000 77800 125 700 28500 186200 $45800 C*

*Net Operating income contra table margin (-) Allocated fixed expense - $ 232000 - $ 186200 = $45800

(26) yes