Chapter 13 Solutions

Exercise 13-2

|EXERCISE 13–2 |The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a mountain bike, and a racing |
|(30 minutes) |bike. Data on sales and expenses for the past quarter follow: LO2 |
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|[pic] |
|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. |

1. No, production and sale of the racing bikes should not be discontinued. If the racing bikes were discontinued, then the net operating income for the company as a whole would decrease by $11,000 each quarter:

|Lost contribution margin | |$(27,000) |
|Fixed costs that can be avoided: | | |
|Advertising, traceable |$ 6,000 | |
|Salary of the product line manager | 10,000 | 16,000 |
|Decrease in net operating income for the company as a whole | |$(11,000) |

The depreciation of the special equipment is a sunk cost and is not relevant to the decision. The common costs are allocated and will continue regardless of whether or not the racing bikes are discontinued; thus, they are not relevant to the decision.

Alternative Solution:

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