Question 3 - Product line Analysis (29 marks) The owners of Mountain Sports Ltd. are currently reviewing a proposal to adopt a new product line- BMX Bicycles. This new product line will be compatible with the Mountain Bikes and open a new target market, younger customers. It is anticipated that the BMX line be introduced next spring, Management has estimated the following: Expected sales in bikes 400 Average selling price perbike $ 392 00 Purchase cost (COGS) per bike $ 146 00 Assembly cost per bike $ 5900 Sales clerks required - seasonal 2. Monthly Salary per Sales Clerk $ 1.139 Sales commissions 15% Advertising campaign (annual cost) $ 5.389 The additional sales clerks required for the BMX line will only work for four months of the year (May to August) Required: Part A (Chapter 6) (13 marks): Prepare a CVP income statement (for a one year period) to determine the segment margin for the new BMX Bikes product line. BMX Product Line Rudated CVP Income Statement 05 06 BMX Product Line Budgeted CVP Income Statement For the year ended December 31, 2020 . Per Bike Percentage Number of Bikes 480 100% Sales Revenue Less Vanable Costs (must be listed alphabetically). 5 Total Variable Costs 7 3 Less. Fixed Costs (must be listed alphabetically) 9 0 51 Total Fixed Cost 32 Required Part B (Chapter 6 & 7) (7 marks): This new BMX bike product line will create an increase in sales of two departments Accessories (refer to Q2 segmented income statement for department information). However, due to the floor space required for retailing BMX Bikes, management estimates that sales of Mountain Bikes will decrease (hint remember that variable costs will also change when sales change) 15 36 Increase in Accessones Sales 11% 27 Decrease in Mountain Bikes Sales 7% 38 What is the impact to the company's income as a whole if the BMX product line is added (hint: consider the segment margin of the BMX product line, and the impact to the other product lines. Remember that if sales change for a product line, the total variable costs will also change. Thus, contribution margin should be used in your calculations for the other product lines). 39 40 41 Increase in BMX Segment Margin $ 12 Increase in Contribution Margin - Accessones Decrease in Contribution Margin - Mountain Bikes 43 (show as negative number) 44 NET Increase (Decrease in Operating Income 445 46 DECISION Should the company add the BMX bike product line? 47 Why or why not? Required Part C: Pricing (Chapter 9) (9 marks) 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. Suggested selling price Required investment in assets Minimum return on investment $ $ 392.00 203,000 14% Calculate the following: Unit product cost (costs incurred to get the bike ready for sale) Total selling & administrative costs (costs that help sell the bike or run the business as a whole) Selling & administrative cost per bike Desired return on investment per bike Markup percentage using absorption costing Suggested selling price using absorption costing
