Note from Kelly, the junior accountant: Hi there! Welcome to the team. I'm Kelly, the junior accountant here at Mountain Sports. I've been working with the company for a while now, helping out with the bookkeeping. My mom is one of the owners.

Anyway, I am quite comfortable with preparing a traditional income statement (this is the income statement learned to prepare in financial accounting). However, the owners are interested in quite a few CVP concepts. I learned about these in my introductory managerial accounting course but it's been a while. Could you help me classify each of the operating expenses as variable or fixed expenses (Part A below)? After that, I think it would be helpful to prepare a CVP income statement (Part B) so that those other concepts (like break-even, the margin of safety, etc) can be calculated (Part C). My mom thought it would be a great idea to present these calculations along with detailed explanations to all of the owners since three of the owners aren't actively involved in the day to day operations of the business. Oh, I should tell you, the owners do not have an accounting background so we have to explain those CVP concepts in a way that they can understand. Thanks so much for your help!

!!!!

You can skip this:

!!!!

But to do this:

And do this please:

Oleksandr Naiavko	11:32 AM (0 minutes ago)
to me

Calculate the following and explain each calculation (in your own words). Be sure to explain what the number you've calculated means, ensuring you write it in a way so that a non-accountant can understand. For example, if you calculate a breakeven point of $1,000, what does $1,000 mean?.

Mountain Sports Ltd. Income Statement For the Year Ended Dec 31, 2019 1,934,320 Sales Cost of goods sold Gross margin 806,863 1,127,457 Operating expenses: (Sec notes) Advertising Depreciation Property taxes Rent Parts & service expenses Salaries and commissions Utilities Total operating expenses Operating income Interest expenses Income before taxes Income taxes Net income 98,000 23,955 39,344 113,373 98,458 450,753 109,469 933,352 194,105 7,000 187,105 44,905 142,200 Variable or Fixed Required: Classify each of the below operating expenses as variable or fixed. Cost 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 13% Rent components: Monthly 3,000 Percentage of sales 4% Utilities costs incurred are independent of sales volume (they will not change ifsales volume changes). 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. Note 1: Sales by Segment (taken from Q2 segmented income statement) Cross Country Ski Packages Mountain Bikes Accessories Sales 696,855 $ 729,322 $ Parts & Service 364,231 $ 143,912 $ Prepare a contribution margin income statement (below), using the traditional income statement provided and the cost information provided in Part A Check figures have been provided to ensure you are on the right track. 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. Mountain Sports Ltd. Contribution Margin Income Statement For the Year Ended Dec 31, 2019 TOTAL PERCENT Sales $1,934,320 10096 Less: Variable Costs (must be listed in alphabetical order): Total variable costs 1,934,320 100.0%6 Contribution Margin Less: Fixed Costs (must be listed in alphabetical order) Advertising - TOTAL Operating Income 1,934,320 7.000 Less: Interest Expense Earnings Before Income Taxes Less: Income Taxes 1.927,320 44,905 Net Income 1,882,415 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 nie? What does leverage mean? Is it better to have high leverage or low leverage? The owner 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