Asignment
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 Bikes
|
Mountain Bikes
|
Racing Bikes
|
|
Sales
|
$
|
300,000
|
|
$
|
90,000
|
|
$
|
150,000
|
|
$
|
60,000
|
|
|
Variable manufacturing and selling expenses
|
|
120,000
|
|
|
27,000
|
|
|
60,000
|
|
|
33,000
|
|
|
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.)