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 Mountain Racing
Bikes Bikes Bikes
Sales $ 300,000 $ 90,000 $ 150,000 $ 60,000
Variable manufacturing and 120,000 27,000 60,000 33,000
selling expenses
Contribution margin 180,000 63,000 90,000 27,000
Fixed expenses:
Advertising, traceable 30,000 10,000 14,000 6,000
Depreciation of special equipment 23,000 6,000 9,000 8,000
Salaries of product-line managers 35,000 12,000 13,000 10,000
Allocated common fixed expenses* 60,000 18,000 30,000 12,000
Total fixed expenses 148,000 46,000 66,000 36,000
Net operating income (loss) $ 32,000 $ 17,000 $ 24,000 $ (9,000)
*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.)
1b. Should production and sale of the racing bikes be discontinued?
a. Yes
b. No
2a. Prepare a segmented income statement.
2b. Would a segmented income statement format be more usable to management in assessing the long-run profitability of the various product lines.
a. Yes
b. No