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 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. A note from the junior accountant, Kelly: Hi again! I have to admit, I don't have much experience with segmented income statements. Our manager, Sarah, was trying to tell me about common and traceable fixed costs. I didn't understand it, so I just ignored it (keep that between us!). I gave it my best shot but I'm really hoping you'll be able to help me. Here's some of the information and assumptions I used when creating this segmented income statement: 1. The sales and cost of goods sold information was taken directly from each department. My manager checked this over and it was correct! You can use this information when you re-state the segmented income statement below. Oh, the parts & service expense is also correct! 2. I just allocated a lot of the expenses equally to the product lines, I wasn't exactly sure what to do. You can see which ones I allocated equally below which include: depreciation, property taxes, rent and utilities. There's some notes to the segmented income statement below which I think should help you determine how to properly do it...or maybe I did do it properly (hmmm, I'm not sure)? My manager said all of these expenses will stay the same even if any one of the product lines were eliminated. In other words, the company would continue to incur all these costs regardless of which product lines are offered. 3. There's a lot of information in the notes regarding salaries and commissions. The parts and service department is treated a bit differently because those employees don't receive commissions. So I just figured out the total salaries and commissions for the other employees and split it equally between cross country skis, mountain bikes and accessories. However, my manager said that these employees will continue to work at the company no matter what they sell all the products in the store). Does that matter? 4. There was some advertising that was spent specifically on each department and then some that was for the company as a whole. I just kind of guessed how to put this into the statement. Maybe this has something to do with the common vs. traceable expense thing? This is so hard! Help! I have a feeling that my statement isn't correct since I ignored the whole common vs. traceable fixed expenses thing and I allocated things equally across some product lines. Can you help me create the segmented income statement properly? Notes Mountain Sports Ltd. Segmented Income Statement For the Year Ended Dec 31, 2019 Cross Country Ski Packages Mountain Bikes 676,934 713,491 49% 48% 333,728 345,972 343,206 367,519 TOTAL 1,876,844 Accessories 350 119 26% 90,961 259,158 Parts & Service 136,300 20% 27,205 109,095 797,867 1,078,977 1 2 9,017 5,604 8,426 26,076 3 4 Sales 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) nterest expense ncome (Loss) before taxes ncome tax Net Income (Loss) 5 6 7 33,049 5,604 8,426 26,076 36,690 123,757 27,029 260,631 82,574 1,500 81,074 14,420 $66,654 42,322 5,604 8,426 26,076 38,672 123,757 27,029 271.885 95,634 1,500 94,134 15,199 $78,935 8,612 5,604 8.4261 26,076 18,977 123,757 27,029 218,480 40,678 1,500 39,178 7,458 $31,720 72,000 27,029 148.151 -39,057 1,500 -40,557 2,903 -$43,460 93,000 22,414 33,702 104,305 94,339 443,271 108.116 899,147 179,830 6,000 173,830 39,981 $133,849 8 23.00% 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 ollows: Cross country ski packages Mountain Bikes Accessories TOTAL Parts & Service Promotes company as a whole 8,000 $ 14 000 $ $ 28,000 $ 37,000 $ 6,000 $ 93,000 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. 4,000 4. Rent has two components: Monthly amount Percentage based on each department's sales 3% 5. Parts and services expense varies with sales of cross country skis, mountain bikes, and accessories. There are no parts & service expense for the parts & service department. 6. Sales commissions are paid on sales for cross country skis, mountain bikes, and accessories. The Parts & Service department employees do not earn sales commissions on their sales. 13% 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. 61,000 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 84,000 $ 72.000 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 expense is $ 6,000 9. Income taxes are calculated for the company as a whole. The company will have to pay taxes regardless of which product lines it offers Required: Part A: (15 marks) 1) Restate the segmented income statement using the statement the junior accountant prepared and the notes to the financial statements (Chapter 7 Appendix) Check figures have been provided to ensure you are on the right track. If you are not arriving at the check figures, please discuss with your group members to determine where you went wrong! Ultimately your group will over-write the check figures with formulas, however, it will be your group's responsibility to ensure that you match up the check figures to the original workbook provided. Notes: The percentage column should be taken as a percentage of sales (for example, cost of goods sold % for mountain bikes should be taken as a % of mountain bike sales) There may be small rounding differences where total amounts are off by $1, that is ok! Make sure you are using full Excel functionality and entering formulas into each cell. You cannot use your calculator and input the final answer. 2. Which product line does the best job of turning sales into profits? (hint: see "SEG" questions in chapter 7 workbook) 3. Management has been trying to decide if any departments should be closed. Based on the segmented income statement you prepared, what are your recommendations to management? Which (if any) department should be closed? 4. Management had been considering closing the Parts & Service Department based on the segmented income statement that the junior accountant prepared. If this segment were closed, management estimates that sales for both Cross Country Skis and Mountain Bikes will decrease (see percentage below). Calculate the overall decrease in income to the company as a whole if the parts & service department is closed. 10% Decrease in cross country skis and mountain bikes Show all amounts as positive numbers: Contribution Margin Lost: Parts & Service Department Cross Country Skis Mountain Bikes Total CM Lost Fixed Costs Avoided Increase (decrease) in income 5. Based on both quantitative and qualitative analysis, should the Parts & Service Department be closed? Explain to management in a way that they can understand. Be sure to use your answer from the previous part in your response. Do not give textbook answers, use question data! (2 marks) 5. Based on both quantitative and qualitative analysis, should the Parts & Service Department be closed? Explain to management in a way that they can understand. Be sure to use your answer from the previous part in your response. Do not give textbook answers, use question data! (2 marks) 6.Please write a brief memo to the junior accountant explaining the changes you made to the segmented income statement. Textbook definitions will not be awarded marks. Please use question data and your own words. Even though the junior accountant has some accounting background, the owners do not. As such, please ensure you write explanations in a way that both the junior accountant and the owners can understand. (5 marks) 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 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. A note from the junior accountant, Kelly: Hi again! I have to admit, I don't have much experience with segmented income statements. Our manager, Sarah, was trying to tell me about common and traceable fixed costs. I didn't understand it, so I just ignored it (keep that between us!). I gave it my best shot but I'm really hoping you'll be able to help me. Here's some of the information and assumptions I used when creating this segmented income statement: 1. The sales and cost of goods sold information was taken directly from each department. My manager checked this over and it was correct! You can use this information when you re-state the segmented income statement below. Oh, the parts & service expense is also correct! 2. I just allocated a lot of the expenses equally to the product lines, I wasn't exactly sure what to do. You can see which ones I allocated equally below which include: depreciation, property taxes, rent and utilities. There's some notes to the segmented income statement below which I think should help you determine how to properly do it...or maybe I did do it properly (hmmm, I'm not sure)? My manager said all of these expenses will stay the same even if any one of the product lines were eliminated. In other words, the company would continue to incur all these costs regardless of which product lines are offered. 3. There's a lot of information in the notes regarding salaries and commissions. The parts and service department is treated a bit differently because those employees don't receive commissions. So I just figured out the total salaries and commissions for the other employees and split it equally between cross country skis, mountain bikes and accessories. However, my manager said that these employees will continue to work at the company no matter what they sell all the products in the store). Does that matter? 4. There was some advertising that was spent specifically on each department and then some that was for the company as a whole. I just kind of guessed how to put this into the statement. Maybe this has something to do with the common vs. traceable expense thing? This is so hard! Help! I have a feeling that my statement isn't correct since I ignored the whole common vs. traceable fixed expenses thing and I allocated things equally across some product lines. Can you help me create the segmented income statement properly? Notes Mountain Sports Ltd. Segmented Income Statement For the Year Ended Dec 31, 2019 Cross Country Ski Packages Mountain Bikes 676,934 713,491 49% 48% 333,728 345,972 343,206 367,519 TOTAL 1,876,844 Accessories 350 119 26% 90,961 259,158 Parts & Service 136,300 20% 27,205 109,095 797,867 1,078,977 1 2 9,017 5,604 8,426 26,076 3 4 Sales 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) nterest expense ncome (Loss) before taxes ncome tax Net Income (Loss) 5 6 7 33,049 5,604 8,426 26,076 36,690 123,757 27,029 260,631 82,574 1,500 81,074 14,420 $66,654 42,322 5,604 8,426 26,076 38,672 123,757 27,029 271.885 95,634 1,500 94,134 15,199 $78,935 8,612 5,604 8.4261 26,076 18,977 123,757 27,029 218,480 40,678 1,500 39,178 7,458 $31,720 72,000 27,029 148.151 -39,057 1,500 -40,557 2,903 -$43,460 93,000 22,414 33,702 104,305 94,339 443,271 108.116 899,147 179,830 6,000 173,830 39,981 $133,849 8 23.00% 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 ollows: Cross country ski packages Mountain Bikes Accessories TOTAL Parts & Service Promotes company as a whole 8,000 $ 14 000 $ $ 28,000 $ 37,000 $ 6,000 $ 93,000 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. 4,000 4. Rent has two components: Monthly amount Percentage based on each department's sales 3% 5. Parts and services expense varies with sales of cross country skis, mountain bikes, and accessories. There are no parts & service expense for the parts & service department. 6. Sales commissions are paid on sales for cross country skis, mountain bikes, and accessories. The Parts & Service department employees do not earn sales commissions on their sales. 13% 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. 61,000 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 84,000 $ 72.000 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 expense is $ 6,000 9. Income taxes are calculated for the company as a whole. The company will have to pay taxes regardless of which product lines it offers Required: Part A: (15 marks) 1) Restate the segmented income statement using the statement the junior accountant prepared and the notes to the financial statements (Chapter 7 Appendix) Check figures have been provided to ensure you are on the right track. If you are not arriving at the check figures, please discuss with your group members to determine where you went wrong! Ultimately your group will over-write the check figures with formulas, however, it will be your group's responsibility to ensure that you match up the check figures to the original workbook provided. Notes: The percentage column should be taken as a percentage of sales (for example, cost of goods sold % for mountain bikes should be taken as a % of mountain bike sales) There may be small rounding differences where total amounts are off by $1, that is ok! Make sure you are using full Excel functionality and entering formulas into each cell. You cannot use your calculator and input the final answer. 2. Which product line does the best job of turning sales into profits? (hint: see "SEG" questions in chapter 7 workbook) 3. Management has been trying to decide if any departments should be closed. Based on the segmented income statement you prepared, what are your recommendations to management? Which (if any) department should be closed? 4. Management had been considering closing the Parts & Service Department based on the segmented income statement that the junior accountant prepared. If this segment were closed, management estimates that sales for both Cross Country Skis and Mountain Bikes will decrease (see percentage below). Calculate the overall decrease in income to the company as a whole if the parts & service department is closed. 10% Decrease in cross country skis and mountain bikes Show all amounts as positive numbers: Contribution Margin Lost: Parts & Service Department Cross Country Skis Mountain Bikes Total CM Lost Fixed Costs Avoided Increase (decrease) in income 5. Based on both quantitative and qualitative analysis, should the Parts & Service Department be closed? Explain to management in a way that they can understand. Be sure to use your answer from the previous part in your response. Do not give textbook answers, use question data! (2 marks) 5. Based on both quantitative and qualitative analysis, should the Parts & Service Department be closed? Explain to management in a way that they can understand. Be sure to use your answer from the previous part in your response. Do not give textbook answers, use question data! (2 marks) 6.Please write a brief memo to the junior accountant explaining the changes you made to the segmented income statement. Textbook definitions will not be awarded marks. Please use question data and your own words. Even though the junior accountant has some accounting background, the owners do not. As such, please ensure you write explanations in a way that both the junior accountant and the owners can understand