Question

The Regal Cycle Company manufactures three types of bicycles—adirt bike, a mountain bike, and a racing bike. Data on sales andexpenses for the past quarter follow:

		Total		Dirt Bikes		Mountain Bikes		Racing Bikes
Sales	$	926,000	$	261,000	$	410,000	$	255,000
Variablemanufacturing and selling expenses		464,000		115,000		199,000		150,000
Contributionmargin		462,000		146,000		211,000		105,000
Fixed expenses:
Advertising, traceable		69,000		8,200		40,300		20,500
Depreciation of special equipment		43,700		20,900		7,100		15,700
Salariesof product-line managers		114,400		40,600		38,600		35,200
Allocated common fixed expenses*		185,200		52,200		82,000		51,000
Total fixedexpenses		412,300		121,900		168,000		122,400
Net operating income(loss)	$	49,700	$	24,100	$	43,000	$	(17,400)

*Allocated on the basis of salesdollars.

Management is concerned about the continued losses shown by theracing bikes and wants a recommendation as to whether or not theline should be discontinued. The special equipment used to produceracing bikes has no resale value and does not wear out.

Required:

1a.

What is the impact on net operating income by discontinuingracing bikes? (Decreases should be indicated by a minussign.)

	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)

Should production and sale of the racing bikes bediscontinued?

Yes

No

Prepare a segmented income statement.

	totals	Dirt bike	Mountain bikes	Racing bikes
Contribution margin (loss)
Fixed expenses:
Total traceable fixed expenses
Net operating income (loss)

Would a segmented income statement format be more usable tomanagement in assessing the long-run profitability of the variousproduct lines.

Yes

No