Exercise 10-2 Dropping or Retaining a Segment [LO10-2]

The Regal Cycle Company manufactures three types of bicyclesa 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	$	928,000	$	262,000	$	407,000	$	259,000
Variable manufacturing and selling expenses		468,000		119,000		193,000		156,000
Contribution margin		460,000		143,000		214,000		103,000
Fixed expenses:
Advertising, traceable		69,900		8,500		40,900		20,500
Depreciation of special equipment		43,900		20,500		7,800		15,600
Salaries of product-line managers		115,900		40,500		38,500		36,900
Allocated common fixed expenses*		185,600		52,400		81,400		51,800
Total fixed expenses		415,300		121,900		168,600		124,800
Net operating income (loss)	$	44,700	$	21,100	$	45,400	$	(21,800)

*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.)

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	Current Total	Total If Racing Bikes Are Dropped	Difference: Net Operating Income Increase or (Decrease)
Sales	$928,000	$669,000
Contribution margin (loss)	928,000	669,000	0
Fixed expenses:
Advertising, traceable	69,900	49,400
Depreciation on special equipment	43,900	43,900
Salaries of product managers	115,900	79,000
Common allocated costs	185,600	185,600
Total fixed expenses	415,300	357,900	0
Net operating income (loss)	$512,700	$311,100	$0

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1b.

Should production and sale of the racing bikes be discontinued?

yes or no?

2a.

Prepare a segmented income statement.

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	Totals	Dirt Bikes	Mountain Bikes	Racing Bikes
Contribution margin (loss)	0	0	0	0
Traceable fixed expenses:
Total traceable fixed expenses	0	0	0	0
	0	$0	$0	$0
Net operating income (loss)	$0

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2b.	Would a segmented income statement format be more usable to management in assessing the long-run profitability of the various product lines. yes or no?