Advertising 99,000 Depreciation 20,981 Property Taxes Rent Salaries Utilities TOTAL Operating Income Less: Interest Expense Earning before income Tax Less: Income tax Net Income 38,013 36.000 221.000 100,044 515,038 267,081 10,000 257 081 64.270 192.811 068 F B E 1 Question 2 - Segmented Income Statement & Product line Analysis (41 marks) H Mountain Sports carries a limited line of products and services that can be divided into four departments (segments): 1. Cross-country ski packages (skis, boots, and poles), 2 Mountain bikes 3. Accessories 4 Parts and service 3 The owners of the company have been pleased with the operating income to date as shown in the company's overall income statement in Question 1. However, they want to get a better idea of how each of its' four departments are doing. The junior accountant, Kelly, thought a segmented income statement would provide the information the owners are looking for, however, Kelly has never prepared a segmented income statement. While Kelly tried to create the segmented statement, she has asked you to review it and make changes as necessary. Additional notes have been provided to the income statement so that you may assess if the junior accountant's statement is correct. Ultimately, it is up to you to provide a corrected segmented income statement and provide recommendations to the owners. Mountain Sports Ltd. Segmented Income Statement For the Year Ended Dec 31, 2019 Notes Cross Country Ski Packages 677,462 43% 290,631 386,831 Mountain Bikes 784,341 46% Parts & Service 116,215 18% Accessories 374,806 30% Sales TOTAL 1,952,824 361,189 20,628 110,643 264,163 783,091 1,169,733 423,152 95,587 1 2 3 4 Cost of goods sold % Cost of goods sold Gross Profit Operating expenses Advertising Depreciation Property taxes Rent Parts & service expense Salaries & commissions Utilities Total Operating Expenses Operating income (loss) Interest expense Income (Loss) before taxes Income tax Net Income (Loss) 99,000 20,981 38,013 75,056 91,432 478,125 100,044 5 6 7 38,163 5,245 9,503 18,764 33,726 136,042 25,011 266,454 120,376 2,500 117,876 22,296 $95,580 43,820 5,245 9,503 18,764 39,047 136,042 25,011 277,432 145,720 2,500 143,220 25,814 $117,406 8,303 5,245 9,503 18,764 18,659 136,042 25,011 221,528 42,636 2,500 40,136 12,335 $27,800 8,714 5,245 9,503 18,764 0 70,000 25,011 137,238 -41,651 2,500 -44,151 3,825 -$47,976 8 902,652 267,081 10,000 257,081 64,270 $192,811 25.00% Notes to the financial statements: 1. Advertising is committed to at the beginning of the period by management. Management has many different forms of advertising campaigns with different focuses as follows: TOTAL Cross country ski packages Mountain Accessories Parts & Service Promotes Bikes company as a whole 34,000 $ 39,000 $ 6,000 $ 8,000 $ 12,000 $ $ 99,000 2. The company uses the straight-line method of depreciation. 3. The property taxes are set by the City and do not change with changes in sales volume. 3,000 4. Rent has two components: Monthly amount Percentage based on each department's sales 2% 5. Parts and services expense varies with sales of cross country skis, mountain bikes, and accessories. There are no parts & servic 6. Sales commissions are paid on sales for cross country skis, mountain bikes, and accessories. The Parts & Service department 14% $ 68,000 Sales commissions Total yearly salary of employees that sell skis, bikes, and accessories. These employees will continue to work for the company regardless of which product lines are offered. The store managers are paid a total yearly salary. They are responsible for all of the departments. These managers will continue to work even if any of the divisions are closed. The Parts & Service Employees only work in that department. If this department were closed, the technicians would be laid off. The total salary for the technicians is $ 83,000 $ 70,000 7. Utilities are the same regardless of activity and will not change even if a product line is dropped. 8. Interest expense is charged on the outstanding bank loans. The total interest & $ 10,000 co th 59 60 61 62 63 54 Mountain Sports Ltd. Segmented Income Statement-By Product Line For the Year Ended December 31, 2019 ross Country Ski Packag Mountain Bikes Accessories Amount Percent Amount Percent Amount Percent Parts and Service Amount Percent TOTAL Amount Percent 65 SALES 677,462 100% 784,341 100.0% 374,806 100.0% 116,215 100.0% 1,952,824 100 0% 56 Less: Variable Costs (MUST BE LISTED ALPHABETICALLY) 57 Cost of Goods Sold 290,631 42.9% 361,189 46.1% 110,643 29.5% 20,628 17.8% 783,091 40.1% 8 Advertising 9 0 TOTAL CONTRIBUTION MARGIN 244,711 36.1% 258,611 33.0% 185,535 49.5% 93 263 80.3% 782.119 40.1% Less: Traceable Fixed Costs (MUST BE LISTED ALPHABETICALLY) TOTAL Traceable Fixed Costs SEGMENT MARGIN $ 210.711 31.1% 219,611 28.0% $ 179,535 47.9% $ 15.263 13.1% $ 625,119 32.0% Less: Common Fixed Costs (MUST BE LISTED ALPHABETICALLY) Advertising Advertising TOTAL Common FIC $ 358,038 OPERATING INCOME 267,081 Less: Interest Expense 10,000 Earnings before taxes 257,081 Less: Income Tax 64,270 NET INCOME 192,811 Advertising 99,000 Depreciation 20,981 Property Taxes Rent Salaries Utilities TOTAL Operating Income Less: Interest Expense Earning before income Tax Less: Income tax Net Income 38,013 36.000 221.000 100,044 515,038 267,081 10,000 257 081 64.270 192.811 068 F B E 1 Question 2 - Segmented Income Statement & Product line Analysis (41 marks) H Mountain Sports carries a limited line of products and services that can be divided into four departments (segments): 1. Cross-country ski packages (skis, boots, and poles), 2 Mountain bikes 3. Accessories 4 Parts and service 3 The owners of the company have been pleased with the operating income to date as shown in the company's overall income statement in Question 1. However, they want to get a better idea of how each of its' four departments are doing. The junior accountant, Kelly, thought a segmented income statement would provide the information the owners are looking for, however, Kelly has never prepared a segmented income statement. While Kelly tried to create the segmented statement, she has asked you to review it and make changes as necessary. Additional notes have been provided to the income statement so that you may assess if the junior accountant's statement is correct. Ultimately, it is up to you to provide a corrected segmented income statement and provide recommendations to the owners. Mountain Sports Ltd. Segmented Income Statement For the Year Ended Dec 31, 2019 Notes Cross Country Ski Packages 677,462 43% 290,631 386,831 Mountain Bikes 784,341 46% Parts & Service 116,215 18% Accessories 374,806 30% Sales TOTAL 1,952,824 361,189 20,628 110,643 264,163 783,091 1,169,733 423,152 95,587 1 2 3 4 Cost of goods sold % Cost of goods sold Gross Profit Operating expenses Advertising Depreciation Property taxes Rent Parts & service expense Salaries & commissions Utilities Total Operating Expenses Operating income (loss) Interest expense Income (Loss) before taxes Income tax Net Income (Loss) 99,000 20,981 38,013 75,056 91,432 478,125 100,044 5 6 7 38,163 5,245 9,503 18,764 33,726 136,042 25,011 266,454 120,376 2,500 117,876 22,296 $95,580 43,820 5,245 9,503 18,764 39,047 136,042 25,011 277,432 145,720 2,500 143,220 25,814 $117,406 8,303 5,245 9,503 18,764 18,659 136,042 25,011 221,528 42,636 2,500 40,136 12,335 $27,800 8,714 5,245 9,503 18,764 0 70,000 25,011 137,238 -41,651 2,500 -44,151 3,825 -$47,976 8 902,652 267,081 10,000 257,081 64,270 $192,811 25.00% Notes to the financial statements: 1. Advertising is committed to at the beginning of the period by management. Management has many different forms of advertising campaigns with different focuses as follows: TOTAL Cross country ski packages Mountain Accessories Parts & Service Promotes Bikes company as a whole 34,000 $ 39,000 $ 6,000 $ 8,000 $ 12,000 $ $ 99,000 2. The company uses the straight-line method of depreciation. 3. The property taxes are set by the City and do not change with changes in sales volume. 3,000 4. Rent has two components: Monthly amount Percentage based on each department's sales 2% 5. Parts and services expense varies with sales of cross country skis, mountain bikes, and accessories. There are no parts & servic 6. Sales commissions are paid on sales for cross country skis, mountain bikes, and accessories. The Parts & Service department 14% $ 68,000 Sales commissions Total yearly salary of employees that sell skis, bikes, and accessories. These employees will continue to work for the company regardless of which product lines are offered. The store managers are paid a total yearly salary. They are responsible for all of the departments. These managers will continue to work even if any of the divisions are closed. The Parts & Service Employees only work in that department. If this department were closed, the technicians would be laid off. The total salary for the technicians is $ 83,000 $ 70,000 7. Utilities are the same regardless of activity and will not change even if a product line is dropped. 8. Interest expense is charged on the outstanding bank loans. The total interest & $ 10,000 co th 59 60 61 62 63 54 Mountain Sports Ltd. Segmented Income Statement-By Product Line For the Year Ended December 31, 2019 ross Country Ski Packag Mountain Bikes Accessories Amount Percent Amount Percent Amount Percent Parts and Service Amount Percent TOTAL Amount Percent 65 SALES 677,462 100% 784,341 100.0% 374,806 100.0% 116,215 100.0% 1,952,824 100 0% 56 Less: Variable Costs (MUST BE LISTED ALPHABETICALLY) 57 Cost of Goods Sold 290,631 42.9% 361,189 46.1% 110,643 29.5% 20,628 17.8% 783,091 40.1% 8 Advertising 9 0 TOTAL CONTRIBUTION MARGIN 244,711 36.1% 258,611 33.0% 185,535 49.5% 93 263 80.3% 782.119 40.1% Less: Traceable Fixed Costs (MUST BE LISTED ALPHABETICALLY) TOTAL Traceable Fixed Costs SEGMENT MARGIN $ 210.711 31.1% 219,611 28.0% $ 179,535 47.9% $ 15.263 13.1% $ 625,119 32.0% Less: Common Fixed Costs (MUST BE LISTED ALPHABETICALLY) Advertising Advertising TOTAL Common FIC $ 358,038 OPERATING INCOME 267,081 Less: Interest Expense 10,000 Earnings before taxes 257,081 Less: Income Tax 64,270 NET INCOME 192,811