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 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?"

Mountain Sports Ltd. Segmented Income Statement For the Year Ended Dec 31, 2019 Cross Country Ski Parts & Notes Packages Mountain Bikes Accessories Service TOTAL Sales 624,724 727,440 370,360 139,607 1,862,131 Cost of goods sold % 46% 47% 26% 14% Cost of goods sold 285,499 342,333 97,812 19,629 745,273 Gross Profit 339.225 385,107 272.548 119.978 1 116.858 Operating expenses Advertising 32,703 45,641 10,381 9,275 98,000 Depreciation 6,191 6,191 6,191 6,191 24,763 Property taxes 9.836 9,836 9,836 9,836 39,345 Rent 15,311 15,311 15,311 15,311 61,243 Parts & service expense 34,252 39,884 20,306 0 94.442 Salaries & commissions 118,234 118,234 118,234 68,000 422,703 Utilities sJ 25.596 25.596 25.596 25.596 102.382 Total Operating Expenses 242,123 260,692 205,855 134,208 842,878 Operating income (loss) 97,102 124,414 66,693 -14,229 273,981 Interest expense 8 2,000 2,000 2.000 2,000 8,000 Income (Loss) before taxes 95,102 122,414 64,693 -16,229 265,981 Income tax 29.00% 25.878 30,132 15,341 5.783 77.134 Net Income (Loss) $69.224 592.282 $49.352 -$22.012 $188.846Notes 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 Accessories Parts & Service Promotes TOTAL Bikes company as a whole S 27,000 S 39,000 | $ 7,000 $ 8,000 S 17,000 S 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 2,000 Percentage based on each department's sales 2% 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 12% 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. S 69,000 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. S 79,000 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 S 68,0007. 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 S 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 TOTAL Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent SALES 624,724 100% 727,440 100.0% 370,360 100.0% 139,607 100.0% 1,862,131 100.0% Less: Variable Costs (MUST BE LISTED ALPHABETICALLY) Cost of Goods Solo 285,499 45.7% 342,333 47.1% 97,812 26.4% 19,629 14.1% 745,273 40.0% Commissions TOTAL Note from Kelly, Junior accountant. Contribution Margin The sales and cost of goods sold information Less: Traceable Fixed Costs (MUST BE LISTED ALPHABETICALLY) Note from Instructor: TOTAL Traceable Fixed Costs Any figures provided in the statement are check figures. If you do not arrive at these Less: Common Fixed Costs (MUST BE LISTED ALPHABETICALLY)12 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 7% 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 18 Increase (decrease) in income5. 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