Question 2 - Segmented Income Statement & Product line Analysis (41 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 prov

"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?"

"Mountain Sports Ltd.

"

Segmented Income Statement

For the Year Ended Dec 31, 2019

Notes Cross Country Ski Packages Mountain Bikes Accessories Parts & Service TOTAL

Sales 657,275 788,574 361,180 129,890 1,936,919

Cost of goods sold % 49% 47% 29% 17%

Cost of goods sold 323,379 372,207 104,309 22,458 822,353

Gross Profit 333,896 416,367 256,871 107,432 1,114,566

Operating expenses

Advertising 1 33,108 48,328 9,356 7,207 98,000

Depreciation 2 5,999 5,999 5,999 5,999 23,994

Property taxes 3 8,011 8,011 8,011 8,011 32,045

Rent 4 23,527 23,527 23,527 23,527 94,108

Parts & service expense 5 34,923 41,900 19,191 0 96,014

Salaries & commissions 6 113,924 113,924 113,924 75,000 416,773

Utilities 7 26,644 26,644 26,644 26,644 106,574

Total Operating Expenses 246,136 268,333 206,652 146,387 867,508

Operating income (loss) 87,760 148,034 50,219 -38,955 247,058

Interest expense 8 2,000 2,000 2,000 2,000 8,000

Income (Loss) before taxes 85,760 146,034 48,219 -40,955 239,058

Income tax 21.00% 17,036 20,439 9,361 3,367 50,202

Net Income (Loss) $68,724 $125,596 $38,858 -$44,322 $188,856

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:

Cross country ski packages Mountain Bikes Accessories Parts & Service Promotes company as a whole TOTAL

$27,000 $41,000 $6,000 $6,000 $18,000 $98,000

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. Rent has two components:

Monthly amount 3,000

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.

Sales commissions 11%

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. $65,000

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. $78,000

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 $75,000

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 $8,000

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: (25 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! See the word document provided to your group containing the check figures!

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."

Mountain Sports Ltd.

Segmented Income Statement-By Product Line

For the Year Ended December 31, 2019

Cross Country Ski Packages Mountain Bikes Accessories Parts and Service Department

Amount Percent Amount Percent Amount Percent Amount Percent

SALES 657,275 100% 788,574 100.0% 361,180 100.0% 129,890 100.0%

Less: Variable Costs (MUST BE LISTED ALPHABETICALLY)

Cost of Goods Sold 323,379 49.2% 372,207 47.2% 104,309 28.9% 22,458 17.3%

Rent

Parts & Service expense

Commissions

TOTAL

Contribution Margin

Less: Traceable Fixed Costs (MUST BE LISTED ALPHABETICALLY)

Advertising

Salaries

TOTAL Traceable Fixed Costs

segment margin

Less: Common Fixed Costs (MUST BE LISTED ALPHABETICALLY)

Advertising

Depreciation

Property Taxes

Rent

Salaries

Utilities

Total Common fixed cost

operating income (loss)

less : interest expense

earning before taxes

less : income tax

net income

Part 2b: Analysis (16 marks)

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.

Decrease in cross country skis and mountain bikes 10%

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)

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)

ide a corrected segmented income statement and provide recommendations to the owners.

Mountain Sports carries a limited line of products and services that can be divided into four departments (segments): 1. Cross country ski packages (skik, boots, and poles). 7. Mountain bikes 3. Accessaries 4. Parts and service looking for, however, Kelly has never prepared a segmented income statement. While kelly tried to create the seghented statensent, Hue has askei ray ta review it anal mate you to provide a corrected segmented incarie atatement and provide recommendabions to the oxnens. A note fram the junior accountant, Kelly. and assumptions lirsed when creoting thirs segmented income statement: 1. The sales and cor of goads sold information wors taken directly from each deportment. My manoger cheched the oner andit war comect Vou cun use thiv ingonnorian whien you ie-state the sepmented income storement below. Oh, the parts 8 service expense is aha caprect depreciation, property taxes, fat and utilifich. There's some notes to the segmented hocome statement beliow which fthink thould helo gou iletermine how to praperiy do if an wards, the company would cartinie to incur aif these casts reyaroless of which jroduct lines are offered. the statement. Moybe this fias something to do with the common wh. trackoble expense thing? Thir it wo horill Hetol Cim you heib mir creote the arompated income atatement properly? Mountain Sports Lta. Segmented income Statement. For the Year Ended Dec 31,2019 : This is my fint attempt at the segmanted inegme statericent. I thank it's sale to cey that in hoid helpl Segmented frcome Statemsent fou the Year Ended Dec 31, 2019 Notes to the financial statements: 1. Advertising is committed to at the heginning of the period by management. Managennent has many different fotms of advertising campaigns with diflerent focuses as follows: 2. The companv uses the straight-tine method of depreciation. 3. The property taxes are set by the City and do not change with changes in sales volume. 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 8 service department 6. Sales commissions are paid on sales for cross country skis, mountain bikes, and accessonios. The Parts \& Service department employees do not eam uales cominsikars on their asei Parts and services expense varies with sales of cross country skis, mountain bikes, and accessories. There are no parts \& servicr eapense for the pats 5 service departinery. Sales commissions are paid on sales for cross country shis, mountain bikes, and accessories. The Parts 8 Service department enploypes do not earn ualer cheminions on their aales. Utilities are the same regardless of activity and will not change even it a product line is dropped 4. Interest expense is charged on the outstanding bank loans. The total interest Part A: (2.5 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 discusi with your group members to determine where you went wrongl See the word document provided to your group containing the check figures! 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 K of mountain bike sales) There may be small rounding differences where total amounts are off by $1, that is okt Make sure you are using full Excel functionality and entering formulas into each cell. You cannot use your calculator and input the final answer. Mountain Sparts ttd. Segmented lncome Statement By Product Line For the Year Ended Decemher a1. on1Q Mouratain Sponts l. Contribution Margin 3 Less: Traceable Fixed Costs (MUST BE LISTED ALPHABETICALLY) Advertising 5 Salaries 6 TOTAL Traceable Fixed Costs segment margin Less: Common Fixed Costs (MUST BE LISTED ALPHABETICALLY) Advertising Depreciation Property Taxes Rent Salaries 2. Which product line does the best job of turning sales into nrafite? (hint. coo "SEG" ausetione in Mountain Sports carries a limited line of products and services that can be divided into four departments (segments): 1. Cross country ski packages (skik, boots, and poles). 7. Mountain bikes 3. Accessaries 4. Parts and service looking for, however, Kelly has never prepared a segmented income statement. While kelly tried to create the seghented statensent, Hue has askei ray ta review it anal mate you to provide a corrected segmented incarie atatement and provide recommendabions to the oxnens. A note fram the junior accountant, Kelly. and assumptions lirsed when creoting thirs segmented income statement: 1. The sales and cor of goads sold information wors taken directly from each deportment. My manoger cheched the oner andit war comect Vou cun use thiv ingonnorian whien you ie-state the sepmented income storement below. Oh, the parts 8 service expense is aha caprect depreciation, property taxes, fat and utilifich. There's some notes to the segmented hocome statement beliow which fthink thould helo gou iletermine how to praperiy do if an wards, the company would cartinie to incur aif these casts reyaroless of which jroduct lines are offered. the statement. Moybe this fias something to do with the common wh. trackoble expense thing? Thir it wo horill Hetol Cim you heib mir creote the arompated income atatement properly? Mountain Sports Lta. Segmented income Statement. For the Year Ended Dec 31,2019 : This is my fint attempt at the segmanted inegme statericent. I thank it's sale to cey that in hoid helpl Segmented frcome Statemsent fou the Year Ended Dec 31, 2019 Notes to the financial statements: 1. Advertising is committed to at the heginning of the period by management. Managennent has many different fotms of advertising campaigns with diflerent focuses as follows: 2. The companv uses the straight-tine method of depreciation. 3. The property taxes are set by the City and do not change with changes in sales volume. 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 8 service department 6. Sales commissions are paid on sales for cross country skis, mountain bikes, and accessonios. The Parts \& Service department employees do not eam uales cominsikars on their asei Parts and services expense varies with sales of cross country skis, mountain bikes, and accessories. There are no parts \& servicr eapense for the pats 5 service departinery. Sales commissions are paid on sales for cross country shis, mountain bikes, and accessories. The Parts 8 Service department enploypes do not earn ualer cheminions on their aales. Utilities are the same regardless of activity and will not change even it a product line is dropped 4. Interest expense is charged on the outstanding bank loans. The total interest Part A: (2.5 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 discusi with your group members to determine where you went wrongl See the word document provided to your group containing the check figures! 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 K of mountain bike sales) There may be small rounding differences where total amounts are off by $1, that is okt Make sure you are using full Excel functionality and entering formulas into each cell. You cannot use your calculator and input the final answer. Mountain Sparts ttd. Segmented lncome Statement By Product Line For the Year Ended Decemher a1. on1Q Mouratain Sponts l. Contribution Margin 3 Less: Traceable Fixed Costs (MUST BE LISTED ALPHABETICALLY) Advertising 5 Salaries 6 TOTAL Traceable Fixed Costs segment margin Less: Common Fixed Costs (MUST BE LISTED ALPHABETICALLY) Advertising Depreciation Property Taxes Rent Salaries 2. Which product line does the best job of turning sales into nrafite? (hint. coo "SEG" ausetione in