5 6 7 Mountain Sports Ltd. Income Statement For the Year Ended Dec 31, 2019 8 9 10 Sales 1,952,824 11 783,091 Cost of goods sold Gross margin 12 1,169,733 16 17 13 Operating expenses: (See notes) 14 Advertising 15 Depreciation Property taxes Rent 18 Parts & service expenses 19 Salaries and commissions 20 Utilities 21 Total operating expenses 22 Operating income 23 Interest expenses 24 Income before taxes 99,000 20,981 38,013 75,056 91,432 478,125 100,044 902,652 267,081 10,000 257,081 25 Income taxes 64,270 192,811 26 Net income 27 28 29 30 Case Intro 01 02 03 X BE D E F G H Cost Variable or Fixed Cost of goods sold increases proportionately with sales Employees are paid fixed monthly salaries supplemented by a commission on all sales except for the Parts & Service department's sales (see note 1 below for sales for each segment). Monthly Salaries To be calculated by the group Commission as a percentage of sales 14% Rent components: Monthly 3,000 Percentage of sales 2% Utilities costs incurred are independent of sales volume (they will not change if sales volume 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. A 7 Note 1: Sales by Segment (taken from Q2 segmented income statement) Cross Country Ski Packages Mountain Bikes Accessories Parts & Service Sales $ 677,462 $ 784,341 $ 374,806 $ 116,215 32 33 Mountain Sports Ltd. Contribution Margin Income Statement 34 35 For the Year Ended Dec 31, 2019 Note frc complet use a ca It will re be mark for all ca 36 37 TOTAL PERCENT 38 Sales $1,952,824 100% 39 Less: Variable Costs (must be listed in alphabetical order): 40 41 42 43 44 Total variable costs 45 46 47 Less: Fixed Costs (must be listed in alphabetical order) Advertising 48 49 50 51 52 53 TOTAL 54 55 56 57 58 59 60 61 Calculation Explanation 1) Breakeven Point in Sales Dollars 2) Margin of Safety (In percent) 3) Degree of Operating Leverage (DOL) (operating income to be used in calculation) 4) 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't really understand that. Can you help me? 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? They expect that sales will increase next year. N/A - no calculations needed