1: Cost Classifications, CVP Income Statement & Analysis (31 marks) Note from Kelly, the junior accountant: Hi there! Welcome to the team. I'm Kelly, the junior accountant here at Mountain Sports. I've been working with the company for awhile now, helping out with the bookkeeping. My mom is one of the owners. Anyway, I am quite comfortable with preparing a traditional income statement (this is the income statement learned to prepare in financial accounting). However, the owners are interested in quite a few CVP concepts. I learned about these in my introductory managerial accounting course but it's been awhile. Could you help me classify each of the operating expenses as variable or fixed expenses (Part A below)? After that, I think it would be helpful to prepare a CVP income statement (Part B) so that those other concepts (like break-even, margin of safety etc) can be calculated (Part C). My mom thought it would be a great idea to present these calculations along with detailed explanations to all of the owners since three of the owners aren't actively involved in the day to day operations of the business. Oh, I should tell you, the owners do not have an accounting background so we have to explain those CVP concepts in a way that they can understand. Thanks so much for your help! Mountain Sports Ltd. Income Statement For the Year Ended Dec 31, 2019 Part A: Cost Classification (Chapter 2, 6) (5 marks) Sales 1,895.344 Cost of goods sold 771.777 Required: Classify each of the below operating expenses as variable or fixed. Cost Variable or Fixed Gross margin 1,123,567 Cost of goods sold increases proportionately with sales Operating expenses: (See notes) Advertising 94,000 Monthly Salaries Depreciation 23.745 Property taxes 37,583 Rent components: Rent 128,860 Parts & service expenses 96.749 Salaries and commissions 403.560 Utilities 103,941 Total operating expenses 888,439 Operating income 235.128 Interest expenses 10,000 Income before taxes 225,128 Income taxes Net income 61,753 163.376 Sales Employees are paid fixed monthly salaries supplemented by a commission on all sales except for the Parts & Service department's sales (see Note I below for sales information by department). Commission as a percentage of sales Monthly Percentage of sales 11% 6,000 3% Utilities costs incurred are independent of sales volume (they will not change if sales volume changes). Parts and Service expense varies with sales activity and can be traced to each product line The company uses straight-line depreciation on all depreciable assets, The property taxes are set by the City and do not change with changes in sales volume Advertising budgets are committed to at the beginning of each year. Note 1: Sales by Department (taken from Q2 segmented income statement) Cross Country Ski Packages 695,709 Mountain Bikes 719,914 Accessories 353,106 Parts & Service 126,6151 Part B: CVP Income Statement (Chapter 6) (13 marks) Prepare a contribution margin income statement (below), using the traditional income statement provided and the cost information provided in Part A Mountain Sports Ltd. Contribution Margin Income Statement For the Year Ended Dec 31, 2019 TOTAL PERCENT Sales $1,895,344 100% Less: Variable Costs (must be listed in alphabetical order): Note from Instructor You will be marked as nstructions! Please re Total variable costs Contribution Margin Less: Fixed Costs (must be listed in alphabetical order) Total Fixed Costs Operating Income Less: Interest Expense Earnings Before Income Taxes Less: Income Taxes Net Income Part C: CVP Analysis (Chapter 6) (13 marks) Calculate the following and explain each calculation (in your own words). Be sure to explain what the number you've calculated means breakeven point of $1,000, what does $1,000 mean? Marks will not be awarded for textbook definitions. 1) Breakeven Point in Sales Dollars 2) Margin of Safety (In percent) Calculation Es 2a) Note from junior accountant: Is higher or lower margin of safety better? Why? N/A no calculations 3) Degree of Operating Leverage (DOL) (operating income to be used in calculation) 4) Estimated percentage decrease in operating income if sales decrease by 20% (use DOL, do not prepare income statement) 4a) The junior accountant left a note for you: In the managerial accounting course that I took. I learned that degree of operating leverage is a measure of risk. I don' really understand that. Can you help me understand? What does leverage mean? Is it better to have high leverage or low leverage? The owners have asked me if they should focus more on variable costs or fixed costs, what should I say? N/A-00 calculations needed CASE STUDY Spring 2022 25% OF COURSE GRADE Overview This case illustrates how managerial accounting concepts can be used to help management better understand their performance, prepare meaningful reports and provide meaningful recommendations to ensure management can make more information decisions for their company. Background Mountain Sports Ltd. is a small, fictional, Lethbridge-based company. This retail store operation is an Alberta Corporation with 20,000 outstanding common shares divided equally amongst five owners. Lisa Marconi, an owner, is the Company President while Jeff Peterson, another owner, holds the position of Marketing Manager. The other three owners are not actively involved in the day to day operations. The company was formed in 2012. Requirements There are numerous requirements to this case study. It is your job to complete the requirements, explain managerial accounting concepts and provide recommendations to the owners in a way that they can understand. One of the owner's children is working on completing an accounting diploma and has been hired as a junior accountant to complete the bookkeeping for the company. The junior accountant has tried preparing some analysis the owners requested but has struggled with it. You will see notes from the junior accountant in some of the questions. The owners need some help with understanding managerial accounting concepts so they can do a better job of planning in the future. The owners do not have an accounting background so you have to be careful when explaining accounting concepts and providing recommendations. Marks will not be awarded for textbook definitions. You must use case data in your explanations and ensure that you are explaining concepts in a way that both the owners and the junior accountant can understand. Calculations All calculations must be completed in Excel. You can use excel formulas or calculate results using a calculator. Round to the nearest 2 digits Check Figures Multiple check figures are provided in the case study to ensure you are on the right track. Please ensure that you can arrive at these check figures before moving on. Since check figures are provided, and this is worth 25% of your course grade, very minimal instructional help will be provided. Please refer back to the work you completed during the semester. The chapter coverage is shown below for each question for your convenience. Question Topic Chapter Covered Marks Available Marks Earned la Cost Classifications 2 5 lb CVP Income Statement 6 13 lc CVP Analysis 6 13 2a Segmented Income Statement 7 25 2b 2c Analysis of Segments & Recommendations to Management Memo to the Junior Accountant 7 18 7 10 3a Budgeted Income Statement for New Product Line 10 13 3b. New Product Line - Impact to Overall Income 6 8 3c 4a 4b Pricing of New Product Line Performance Measurement Calculations Analysis of Performance 9 12 11 4 11 6. TOTAL 127 Grade Earned