12:51 7723 BNE 100% MBAC-5103-A3-MA-S20.pdf MBAC-5103 MA Assignment II. Financial Information continued Mountain Sports Ltd. Income Statement Segmented by Product Line For the Year Ended December 31, 2020 (See note 7) Cross Country Ski Mountain Packages Bicycles Accessories Repair & Service Dept. TOTAL Sales Cost of goods sold Gross Profit 1,940,401 826,372 1,114,029 603,060 271,377 331,683 820,943 377634 443 309 399,605 159 842 239,763 116,793 17,519 99,274 7,406 5,335 8,000 33,702 Operating expenses (see note 7) Advertising Depreciation Property taxes Rent Repairs & service expense Salaries & commissions Utilities Total Expenses Operating income (loss) Interest expenses (see note 9) Income (Loss) before taxes Income tax (see note 10) Net Income (Loss) 123,040 21,341 32,000 134,807 94,118 320,710 100.000 826,016 288,013 38,240 5,335 8,000 33,702 31.124 83,570 25.000 224,971 106,712 52,056 5,335 8,000 33,702 42,370 83,570 25,000 250,032 193,277 25,339 5,335 8,000 33,702 20,624 83,570 25,000 201,570 38,193 1,603 70,000 25,000 149.443 (50,169) 13 1,603 281,600 78,849 202,751 105,109 24,506 1,603 191,674 33,359 158,314 36,590 16,238 20,352 1,603 (51,772) 4,746 (56,518) 80,604 Page 5 of 12 MBAC 5100 MA Asment Requirement 2: Product Line Analysis The Issues: (Note: Treat each issue below independently In order to resolve two product line issues, first reformat the December 31, 2020-Income Statement-Segmented by Product Line (Page 5) using the contribution marginapproach. Information in note 7 will be helpful in reformatting the income statement The revised Segmented Income Statement should be consistent with the Contribution Approach format of the overall company prepared in Port A-CVP Analysis a) Keep or Close a Department? Refer to page 5 - Income Statement -Segmented by Product Line. The owners think they should eliminate the Accessories and Repair & Service Departments as they are the least profitable. The segments reported a $20,352 profit and $56,518 loss, respectively las shown on page 5) After reformatting the income statement, what do you recommend to the owners and why? b) Add a New Product Line? The owners of Mountain Sports Ltd. are currently reviewing a proposal to adopt a new product line - BMX Bicycles. This new product line will be compatible with the Mountain Bikes and open a new target market-younger customers. It is anticipated that the BMX line will be introduced next spring Management estimates sales of 300 bikes a year at an average selling price of $450. The bikes will have a per unit purchase cost(COGS) of $160. Each bike needs about 590 of service time to assemble and service) Mountain Sports will need to hire another two (2) sales clerks to specialize in BMX bikes at a monthly salary of $1,600 each plus commission (3% of sales). These clerks will be kept on staff for only four months per year (May to August). It is also estimated that advertising costs on the BMX line will be $15,000 annually The current facilities have enough space to accommodate the new product line. Should management adopt this new product line (BMX Bicycles? Show relevant (incremental approach calculations only. Do not redo the income statement Page 10 of 12 MBAC-5103 MA Ant Financial Information Mountain Sports Ltd. Balance Sheet December 31, 2020 ASSETS Cash Accounts receivable (see note 4) Merchandise inventory (see note 5) Vehicles (net) Furniture and fixtures (net) Total Assets 210,045 93,480 302,670 137.171 218,880 962 246 77,520 38,833 142.500 258.853 LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Wages payable Accounts payable (see note 6) Shareholders' loan payable (see note 2) Total Liabilities SHAREHOLDERS' Equity Share Capital: Common shares, no par value 100,000 shares authorized, 20,000 shares issued Retained Earnings Total Shareholders' Equity Total Liabilities and Shareholders' Equity 228,000 475,393 703,393 962,246 Page 3 of 12 MRAC SIO MA Assignment 3 1. Financial Information continued Mountain Sports Ltd. Income Statement For the Year Ended December 31, 2020 Sales Cost of Goods Sold Gross profit on sales 1,940,401 826, 372 1,114,029 Operating expenses: (See note 1) Advertising (see note 7c) Depreciation Property taxes Rent (see note 1b) Repairs & service expenses Salaries and commissions Utilities Total operating expenses Operating income Interest expenses (See note 2) Income before taxes Income taxes (see note 3) Net Income 123,040 21,341 32,000 134,808 94,118 320,708 100 000 826,015 288,014 6,413 281,601 78,849 202,753 MA Assignment 3 II. Financial Information continued Mountain Sports Ltd. Income Statement Segmented by Product Line For the Year Ended December 31, 2020 (See note 7) Cross Country Ski Mountain Packages Bicycles Accessories Repair & Service Dept. TOTAL Sales Cost of goods sold Gross Profit 1,940,401 826,372 1,114.029 603,060 271,377 331,683 820,943 377,634 443 309 399,605 159,842 239,263 116,793 17,519 99,274 7,406 5,335 8,000 33,702 Operating expenses (see note 7) Advertising Depreciation Property taxes Rent Repairs & service expense Salaries & commissions Utilities Total Expenses Operating income (loss) Interest expenses (see note 9) Income (Loss) before taxes Income tax (see note 10) Net Income (Loss) 123,040 21,341 32,000 134,807 94,118 320,710 100.000 826,016 288,013 38,240 5,335 8,000 33,702 31,124 83,570 25,000 224,971 106,712 52,056 5,335 8,000 33,702 42,370 83,570 25,000 250,032 193 277 25,339 5,335 8,000 33,702 20,624 83,570 25.000 201,570 38,193 70,000 25,000 149,443 (50 169 1,603 6,413 1,603 1,603 1,603 191,674 36,590 (51,772) 281,600 78,849 105,109 24,506 33,359 16,238 20,352 4,746 (56,518) 202,751 80,604 158,314 Page 5 of 12 MBAC-5103 MA Assignment 3 III. Notes to Financial Information 1. The following information relates to operating expenses a) Employees are paid fixed monthly salaries supplemented by a 3% commission on all sales except for the Repair & Service department's sales. b) The rent is fixed at $8,000 per month plus 2% of sales. c) Utilities are fixed costs, even though they will increase significantly next year. d) Repairs and Service expense varies with sales activity. e) Depreciation and property taxes are fixed costs. f) Advertising budgets are committed to at the beginning of each year. B) Cost of goods sold always varies with sales 2. The interest expense represents the 4.5% interest charge on the outstanding shareholders' loan 3. Income taxes are calculated at 28% of income before taxes. 4. Accounts receivable are generated through a small number of large sales to sports rental operations and school boards. Uncollectible accounts have not been a problem and are negligible. 5. Because much of the merchandise inventory is produced in Asia, large orders are placed several months prior to peak seasons. Ordering well in advance saves ordering and shipping costs. 6. Accounts payable to suppliers are promptly paid within 30 days. 100% MBAC-5103-A3-MA-S20.pdf III. Notes to Financial Information continued 7. The following information relates to the Income Statement Segmented by Product Line: a) Rent, utilities, depreciation, and property taxes have been allocated equally amongst the 4 product lines. However, if any one of the product lines was eliminated, these costs will remain. b) Details of salaries and commissions follow (payroll fringe benefits are included): 3% sales commissions were paid on all sales except for the sales of the Repair & Service department H. The two (2) managers are paid $38,000 each per year, Both are responsible for the company as a whole. iii. Besides sales commissions, the four (4) sales clerks are paid $2,500 each per month. They sell all 3 product lines (skis, bikes and accessories). If any product line is eliminated, the sales clerks will still remain. iv. During the year, the two (2) Repair & Service technicians combined were paid a total salary of $70,000 for the whole year and are allocated entirely to the R&S department. Thus, if the department was discontinued, the technicians would not be required c) Advertising Mountain Sports Ltd. spent advertising on product lines as follows: $ 25,000 For the company as a whole For the individual product lines: Cross Country Skis Mountain Bikes Accessories Repair & Service Total Advertising Cost $ 38,190 45,600 5,700 8,550 98,040 $123,040 Note: you will observe that the amounts on the income statement differ for the individual product lines due to the allocation of $25,000 in general company advertising costs. Page 7 of 12 100% MBAC-5103-A3-MA-S20.pdf MBAC-5103 MA Assignment 3 III. Notes to Financial Information continued 8. Interest expense has been allocated equally to each product line & Repair & Service department. Interest expense is considered a financing cost which benefits the whole operation. Therefore, they are not traceable to any individual product line or department. 9. Income taxes have been allocated based on sales. Income taxes are calculated after all costs, including common costs have been deducted. Therefore, they are not traceable to any individual product line or department. MAC-5103 MA Assement Requirement 2: Product Line Analysis The Issues: (Note: Treat each issue below independently In order to resolve two product line issues, first reformat the December 31, 2020-Income Statement-Segmented by Product Line (Page 5) using the contribution marginapproach Information in note 7 will be helpful in reformatting the income statement The revised Segmented Income Statement should be consistent with the Contribution Approach format of the overall company prepared in Port A-CVP Analysis a) Keep or Close a Department? Refer to page 5 - Income Statement -Segmented by Product Line. The owners think they should eliminate the Accessories and Repair & Service Departments as they are the least profitable. The segments reported a $20,352 profit and $56,518 loss, respectively las shown on page 51 After reformatting the income statement, what do you recommend to the owners and why? b) Add a New Product Line? The owners of Mountain Sports Ltd. are currently reviewing a proposal to adopt a new product line-BMX Bicycles. This new product line will be compatible with the Mountain Bikes and open a new target market-younger customers. It is anticipated that the BMX line will be introduced next spring. Management estimates sales of 300 bikes a year at an average selling price of $450. The bikes will have a per unit purchase cost (COGS) of $160. Each bike needs about $90 of service time to assemble and service) Mountain Sports will need to hire another two (2) sales clerks to specialize in BMX bikes at a monthly salary of $1,600 each plus commission (3% of sales). These clerks will be kept on staff for only four months per year (May to August). It is also estimated that advertising costs on the BMX line will be $15,000 annually. The current facilities have enough space to accommodate the new product line. Should management adopt this new product line (BMX Bicycles)? Show relevant (incremental approach) calculations only. Do not redo the income statement Page 10 of 12 MBAC-5103-A3-MA-S20.pdf 100% MA Assement Requirement 2: Product Line Analysis The Issues: (Note: Treat each issue below independently In order to resolve two product line issues, first reformat the December 31, 2020 -Income Statement - Segmented by Product Line (Page 5) using the contribution margin approach Information in note 7 will be helpful in reformatting the income statement The revised Segmented Income Statement should be consistent with the Contribution Approach format of the overall company prepared in Port A-CVP Analysis a) Keep or Close a Department? Refer to page 5 - Income Statement-Segmented by Product Line. The owners think they should eliminate the Accessories and Repair & Service Departments as they are the least profitable. The segments reported a $20,352 profit and $56,518 loss, respectively as shown on page 5). After reformatting the income statement, what do you recommend to the owners and why? b) Add a New Product Line? The owners of Mountain Sports Ltd. are currently reviewing a proposal to adopt a new product line - BMX Bicycles. This new product line will be compatible with the Mountain Bikes and open a new target market--younger customers. It is anticipated that the BMX line will be introduced next spring Management estimates sales of 300 bikes a year at an average selling price of $450. The bikes will have a per unit purchase cost (COGS) of $160. Each bike needs about $90 of service time (to assemble and service). Mountain Sports will need to hire another two (2) sales clerks to specialize in BMX bikes at a monthly salary of $1,600 each plus commission (3% of sales). These clerks will be kept on staff for only four months per year (May to August). It is also estimated that advertising costs on the BMX line will be $15,000 annually. The current facilities have enough space to accommodate the new product line. Should management adopt this new product line (BMX Bicycles)? Show relevant (incremental approach) calculations only. Do not redo the income statement. Pape 10 of 12 12:51 7723 BNE 100% MBAC-5103-A3-MA-S20.pdf MBAC-5103 MA Assignment II. Financial Information continued Mountain Sports Ltd. Income Statement Segmented by Product Line For the Year Ended December 31, 2020 (See note 7) Cross Country Ski Mountain Packages Bicycles Accessories Repair & Service Dept. TOTAL Sales Cost of goods sold Gross Profit 1,940,401 826,372 1,114,029 603,060 271,377 331,683 820,943 377634 443 309 399,605 159 842 239,763 116,793 17,519 99,274 7,406 5,335 8,000 33,702 Operating expenses (see note 7) Advertising Depreciation Property taxes Rent Repairs & service expense Salaries & commissions Utilities Total Expenses Operating income (loss) Interest expenses (see note 9) Income (Loss) before taxes Income tax (see note 10) Net Income (Loss) 123,040 21,341 32,000 134,807 94,118 320,710 100.000 826,016 288,013 38,240 5,335 8,000 33,702 31.124 83,570 25.000 224,971 106,712 52,056 5,335 8,000 33,702 42,370 83,570 25,000 250,032 193,277 25,339 5,335 8,000 33,702 20,624 83,570 25,000 201,570 38,193 1,603 70,000 25,000 149.443 (50,169) 13 1,603 281,600 78,849 202,751 105,109 24,506 1,603 191,674 33,359 158,314 36,590 16,238 20,352 1,603 (51,772) 4,746 (56,518) 80,604 Page 5 of 12 MBAC 5100 MA Asment Requirement 2: Product Line Analysis The Issues: (Note: Treat each issue below independently In order to resolve two product line issues, first reformat the December 31, 2020-Income Statement-Segmented by Product Line (Page 5) using the contribution marginapproach. Information in note 7 will be helpful in reformatting the income statement The revised Segmented Income Statement should be consistent with the Contribution Approach format of the overall company prepared in Port A-CVP Analysis a) Keep or Close a Department? Refer to page 5 - Income Statement -Segmented by Product Line. The owners think they should eliminate the Accessories and Repair & Service Departments as they are the least profitable. The segments reported a $20,352 profit and $56,518 loss, respectively las shown on page 5) After reformatting the income statement, what do you recommend to the owners and why? b) Add a New Product Line? The owners of Mountain Sports Ltd. are currently reviewing a proposal to adopt a new product line - BMX Bicycles. This new product line will be compatible with the Mountain Bikes and open a new target market-younger customers. It is anticipated that the BMX line will be introduced next spring Management estimates sales of 300 bikes a year at an average selling price of $450. The bikes will have a per unit purchase cost(COGS) of $160. Each bike needs about 590 of service time to assemble and service) Mountain Sports will need to hire another two (2) sales clerks to specialize in BMX bikes at a monthly salary of $1,600 each plus commission (3% of sales). These clerks will be kept on staff for only four months per year (May to August). It is also estimated that advertising costs on the BMX line will be $15,000 annually The current facilities have enough space to accommodate the new product line. Should management adopt this new product line (BMX Bicycles? Show relevant (incremental approach calculations only. Do not redo the income statement Page 10 of 12 MBAC-5103 MA Ant Financial Information Mountain Sports Ltd. Balance Sheet December 31, 2020 ASSETS Cash Accounts receivable (see note 4) Merchandise inventory (see note 5) Vehicles (net) Furniture and fixtures (net) Total Assets 210,045 93,480 302,670 137.171 218,880 962 246 77,520 38,833 142.500 258.853 LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Wages payable Accounts payable (see note 6) Shareholders' loan payable (see note 2) Total Liabilities SHAREHOLDERS' Equity Share Capital: Common shares, no par value 100,000 shares authorized, 20,000 shares issued Retained Earnings Total Shareholders' Equity Total Liabilities and Shareholders' Equity 228,000 475,393 703,393 962,246 Page 3 of 12 MRAC SIO MA Assignment 3 1. Financial Information continued Mountain Sports Ltd. Income Statement For the Year Ended December 31, 2020 Sales Cost of Goods Sold Gross profit on sales 1,940,401 826, 372 1,114,029 Operating expenses: (See note 1) Advertising (see note 7c) Depreciation Property taxes Rent (see note 1b) Repairs & service expenses Salaries and commissions Utilities Total operating expenses Operating income Interest expenses (See note 2) Income before taxes Income taxes (see note 3) Net Income 123,040 21,341 32,000 134,808 94,118 320,708 100 000 826,015 288,014 6,413 281,601 78,849 202,753 MA Assignment 3 II. Financial Information continued Mountain Sports Ltd. Income Statement Segmented by Product Line For the Year Ended December 31, 2020 (See note 7) Cross Country Ski Mountain Packages Bicycles Accessories Repair & Service Dept. TOTAL Sales Cost of goods sold Gross Profit 1,940,401 826,372 1,114.029 603,060 271,377 331,683 820,943 377,634 443 309 399,605 159,842 239,263 116,793 17,519 99,274 7,406 5,335 8,000 33,702 Operating expenses (see note 7) Advertising Depreciation Property taxes Rent Repairs & service expense Salaries & commissions Utilities Total Expenses Operating income (loss) Interest expenses (see note 9) Income (Loss) before taxes Income tax (see note 10) Net Income (Loss) 123,040 21,341 32,000 134,807 94,118 320,710 100.000 826,016 288,013 38,240 5,335 8,000 33,702 31,124 83,570 25,000 224,971 106,712 52,056 5,335 8,000 33,702 42,370 83,570 25,000 250,032 193 277 25,339 5,335 8,000 33,702 20,624 83,570 25.000 201,570 38,193 70,000 25,000 149,443 (50 169 1,603 6,413 1,603 1,603 1,603 191,674 36,590 (51,772) 281,600 78,849 105,109 24,506 33,359 16,238 20,352 4,746 (56,518) 202,751 80,604 158,314 Page 5 of 12 MBAC-5103 MA Assignment 3 III. Notes to Financial Information 1. The following information relates to operating expenses a) Employees are paid fixed monthly salaries supplemented by a 3% commission on all sales except for the Repair & Service department's sales. b) The rent is fixed at $8,000 per month plus 2% of sales. c) Utilities are fixed costs, even though they will increase significantly next year. d) Repairs and Service expense varies with sales activity. e) Depreciation and property taxes are fixed costs. f) Advertising budgets are committed to at the beginning of each year. B) Cost of goods sold always varies with sales 2. The interest expense represents the 4.5% interest charge on the outstanding shareholders' loan 3. Income taxes are calculated at 28% of income before taxes. 4. Accounts receivable are generated through a small number of large sales to sports rental operations and school boards. Uncollectible accounts have not been a problem and are negligible. 5. Because much of the merchandise inventory is produced in Asia, large orders are placed several months prior to peak seasons. Ordering well in advance saves ordering and shipping costs. 6. Accounts payable to suppliers are promptly paid within 30 days. 100% MBAC-5103-A3-MA-S20.pdf III. Notes to Financial Information continued 7. The following information relates to the Income Statement Segmented by Product Line: a) Rent, utilities, depreciation, and property taxes have been allocated equally amongst the 4 product lines. However, if any one of the product lines was eliminated, these costs will remain. b) Details of salaries and commissions follow (payroll fringe benefits are included): 3% sales commissions were paid on all sales except for the sales of the Repair & Service department H. The two (2) managers are paid $38,000 each per year, Both are responsible for the company as a whole. iii. Besides sales commissions, the four (4) sales clerks are paid $2,500 each per month. They sell all 3 product lines (skis, bikes and accessories). If any product line is eliminated, the sales clerks will still remain. iv. During the year, the two (2) Repair & Service technicians combined were paid a total salary of $70,000 for the whole year and are allocated entirely to the R&S department. Thus, if the department was discontinued, the technicians would not be required c) Advertising Mountain Sports Ltd. spent advertising on product lines as follows: $ 25,000 For the company as a whole For the individual product lines: Cross Country Skis Mountain Bikes Accessories Repair & Service Total Advertising Cost $ 38,190 45,600 5,700 8,550 98,040 $123,040 Note: you will observe that the amounts on the income statement differ for the individual product lines due to the allocation of $25,000 in general company advertising costs. Page 7 of 12 100% MBAC-5103-A3-MA-S20.pdf MBAC-5103 MA Assignment 3 III. Notes to Financial Information continued 8. Interest expense has been allocated equally to each product line & Repair & Service department. Interest expense is considered a financing cost which benefits the whole operation. Therefore, they are not traceable to any individual product line or department. 9. Income taxes have been allocated based on sales. Income taxes are calculated after all costs, including common costs have been deducted. Therefore, they are not traceable to any individual product line or department. MAC-5103 MA Assement Requirement 2: Product Line Analysis The Issues: (Note: Treat each issue below independently In order to resolve two product line issues, first reformat the December 31, 2020-Income Statement-Segmented by Product Line (Page 5) using the contribution marginapproach Information in note 7 will be helpful in reformatting the income statement The revised Segmented Income Statement should be consistent with the Contribution Approach format of the overall company prepared in Port A-CVP Analysis a) Keep or Close a Department? Refer to page 5 - Income Statement -Segmented by Product Line. The owners think they should eliminate the Accessories and Repair & Service Departments as they are the least profitable. The segments reported a $20,352 profit and $56,518 loss, respectively las shown on page 51 After reformatting the income statement, what do you recommend to the owners and why? b) Add a New Product Line? The owners of Mountain Sports Ltd. are currently reviewing a proposal to adopt a new product line-BMX Bicycles. This new product line will be compatible with the Mountain Bikes and open a new target market-younger customers. It is anticipated that the BMX line will be introduced next spring. Management estimates sales of 300 bikes a year at an average selling price of $450. The bikes will have a per unit purchase cost (COGS) of $160. Each bike needs about $90 of service time to assemble and service) Mountain Sports will need to hire another two (2) sales clerks to specialize in BMX bikes at a monthly salary of $1,600 each plus commission (3% of sales). These clerks will be kept on staff for only four months per year (May to August). It is also estimated that advertising costs on the BMX line will be $15,000 annually. The current facilities have enough space to accommodate the new product line. Should management adopt this new product line (BMX Bicycles)? Show relevant (incremental approach) calculations only. Do not redo the income statement Page 10 of 12 MBAC-5103-A3-MA-S20.pdf 100% MA Assement Requirement 2: Product Line Analysis The Issues: (Note: Treat each issue below independently In order to resolve two product line issues, first reformat the December 31, 2020 -Income Statement - Segmented by Product Line (Page 5) using the contribution margin approach Information in note 7 will be helpful in reformatting the income statement The revised Segmented Income Statement should be consistent with the Contribution Approach format of the overall company prepared in Port A-CVP Analysis a) Keep or Close a Department? Refer to page 5 - Income Statement-Segmented by Product Line. The owners think they should eliminate the Accessories and Repair & Service Departments as they are the least profitable. The segments reported a $20,352 profit and $56,518 loss, respectively as shown on page 5). After reformatting the income statement, what do you recommend to the owners and why? b) Add a New Product Line? The owners of Mountain Sports Ltd. are currently reviewing a proposal to adopt a new product line - BMX Bicycles. This new product line will be compatible with the Mountain Bikes and open a new target market--younger customers. It is anticipated that the BMX line will be introduced next spring Management estimates sales of 300 bikes a year at an average selling price of $450. The bikes will have a per unit purchase cost (COGS) of $160. Each bike needs about $90 of service time (to assemble and service). Mountain Sports will need to hire another two (2) sales clerks to specialize in BMX bikes at a monthly salary of $1,600 each plus commission (3% of sales). These clerks will be kept on staff for only four months per year (May to August). It is also estimated that advertising costs on the BMX line will be $15,000 annually. The current facilities have enough space to accommodate the new product line. Should management adopt this new product line (BMX Bicycles)? Show relevant (incremental approach) calculations only. Do not redo the income statement. Pape 10 of 12