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Rec The owners of Mountain Sports Ltd. are currently reviewing a proposal to adopt a new product line - BMX Bikes. This new product line will be compatible with their existing product line, Mountain Bikes and open a new target market, younger customers. It is anticipated that the BMX line be introduced next spring Par luis 3 Management has estimated the following for the BMX Bike product lines 4 Expected sales 1,000 bikes 5 Selling price $ 400.00 per bike 6 Expenses: 7 Advertising $ 10,000 annually 8 Assembly $ 100.00 per bike Cost of Goods Sold $ 200.00 per bike 10 Rent 5% of sales 1 *Salaries $ 5,000 per month Sales commissions 10% of sales *The company will need to hire two sales clerks for the BMX line. This sales clerk will only work for six months of the year (May to October) Part A Prepare a budgeted CVP income statement (for a one year period) to determine the segment margin for the new BMX Bikes product line. (8 marks) Percentage BMX Product Line Budgeted CVP Income Statement For the year ended December 31, 2020 TOTAL Per Bike Number of Bikes 1,000 Sales Revenue Less: Variable Costs (must be listed alphabetically) Assembly Cost of Goods Sold Rent Sales commissions Total Variable Costs Contribution margin Less: Fixed Costs (must be listed alphabetically) Advertising Salaries Percentage BMX Product Line Budgeted CVP Income Statement For the year ended December 31, 2020 TOTAL Per Bike Number of Bikes 1,000 Sales Revenue Less: Variable Costs (must be listed alphabetically) Assembly Cost of Goods Sold Rent Sales commissions Total Variable Costs Contribution margin Less: Fixed Costs (must be listed alphabetically) Advertising Salaries Total Fixed Costs BMX SEGMENT MARGIN BMX 18 calculated in your explanation): Explanation 79 Should the company introduce the BMX Line? Why or why not? 20 When sales are decreasing, would management like to have a high or low degree of operating leverage. Why? 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. 24 25 Required investment in assets $ 200,000 26 Minimum return on investment 15% 27 28 Calculate the following: 29 Unit product cost Selling & Admin cost per bike 30 Desired return on investment per bike (in dollars) Markup percentage using aborption costing Target Selling price using absorption costing Markup percentage using aborption 32 costing Target Selling price using absorption 33 costing 34 35 Is the selling price of noted in part A, sufficient to earn the minimum required return expected by the owners? (Yes or No) Why or why not? Partner Coutine mars Suppose management has determined that the maximum selling price that the market is willing to pay is $300 and they are selling 1,000 units. Assume management wants to earn a 15 return on investment 43 Maximum selling price $300 # Target Cost per Bike (1 marks) 45 What advice would you give to management to help them achieve the target cost you 46 calculated above? (2 marks) 4 47