HU B 1 2 Question 3 - Product line Analysis (29 marks) 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 be introduced next spring. 3 380 S 2 $ 15% $ 4 Management has estimated the following: 5 Expected sales in bikes 6 Average selling price per bike $ 399.00 7 Purchase cost (COGS) per bike $ 133.00 8 Assembly cost per bike 57.00 9 Sales clerks required - seasonal 10 Monthly Salary per Sales Clerk 1,087 11 Sales commissions 12 Advertising campaign (annual cost) 4,328 13 14 The additional sales clerks required for the BMX line will only work for four months of the year (May to August) 15 Required: Part A (Chapter 6) (13 marks): Prepare a CVP income statement (for a one year period) to determine the segment margin for the new BMX Bikes product line. 16 17 BMX Product Line Budgeted CVP Income Statement 18 For the year ended December 31, 2020 TOTAL Per Bike 19 Percentage 00 B D E the new BMX Bikes product line. 16 17 18 19 BMX Product Line Budgeted CVP Income Statement For the year ended December 31, 2020 TOTAL Per Bike Percentage 20 Number of Bikes 380 21 Sales Revenue 100% 22 Less: Variable Costs (must be listed alphabetically) 23 24 25 26 Total Variable Costs 27 28 Less: Fixed Costs (must be listed alphabetically) 29 30 31 Total Fixed Cost 32 34 Required Part B (Chapter 6 & 7) (7 marks): This new BMX bike product line will create an increase in sales of two departments: Accessories (refer to Q2 segmented income statement for department information). However, due to the floor space required for retailing BMX Bikes, management estimates that sales of Mountain Bikes will decrease (hint: remember that variable costs will also change when sales change). 35 36 Increase in Accessories Sales 11% 37 Decrease in Mountain Bikes Sales 5% 38 What is the impact to the company's income as a whole if the BMX product line is added (hint: consider the segment margin of the BMX product line, and the impact to the other product lines. Remember that if sales change for a product line, the total variable costs will also change. Thus, contribution margin should be used in your calculations for the other product 39 lines). 40 $ 41 Increase in BMX Segment Margin 42 Increase in Contribution Margin - Accessories Decrease in Contribution Margin - Mountain Bikes 43 (show as negative number) 44 NET Increase (Decrease) in Operating Income 45 46 DECISION: Should the company add the BMX bike product line? 47 48 Why or why not? + G Required Part C: Pricing (Chapter 9) (9 marks) Assume management has decided to go ahead with offering the BMX product line. The owners of Mountain Sports are concerned about the ability of BMX to cover its fixed costs and provide a good return on investment (ROI). An investment is required for the necessary fixtures, display racks, and inventory. The owners have provided the minimum return on investment below. Use the cost information and unit sales provided in part A above to answer the questions below. 51 52 Suggested selling price $ 399.00 53 Required investment in assets $ 203,000 54 Minimum return on investment 16% 55 56 Calculate the following: Unit product cost (costs incurred to get the bike ready 57 for sale) Total selling & administrative costs (costs that help sell 58 the bike or run the business as a whole) 59 Selling & administrative cost per bike 60 Desired return on investment per bike 61 Markup percentage using absorption costing 62 Suggested selling price using absorption costing 63 64 Is the suggested selling price (noted in part A) sufficient to earn the required return expected by the 55 owners? 56 Are there any other considerations management should take into account before adding the product line? G 52 Suggested selling price $ 399.00 53 Required investment in assets $ 203,000 54 Minimum return on investment 16% 55 56 Calculate the following: Unit product cost (costs incurred to get the bike ready 57 for sale) Total selling & administrative costs (costs that help sell 58 the bike or run the business as a whole) 59 Selling & administrative cost per bike 50 Desired return on investment per bike 51 Markup percentage using absorption costing 2 Suggested selling price using absorption costing 3 4 Is the suggested selling price (noted in part A) sufficient to earn the required return expected by the s owners? 5 Are there any other considerations management should take into account before adding the product line