The question is 1.firstreformatIncome Statement - Segmented by Product Lineusing the contribution margin approach.
2. Informationin7willbehelpfulinreformattingtheincomestatementwith the Contribution Approach format.
1. The following information relates to operating expenses: a) Employees are paid fixed monthly salaries supplemented by a 3% commission on all sales except for the Repair & Service department's sales. b) The rent is fixed at $8,000 per month plus 2% of sales. c) Utilities are fixed costs, even though they will increase significantly next year. d) Repairs and Service expense varies with sales activity. e) Depreciation and property taxes are fixed costs. f) Advertising budgets are committed to at the beginning of each year. g) Cost of goods sold always varies with sales. 2. The interest expense represents the 4.5% interest charge on the outstanding shareholders' loan. 3. Income taxes are calculated at 28% of income before taxes. 4. Accounts receivable are generated through a small number of large sales to sports rental operations and school boards. Uncollectible accounts have not been a problem and are negligible.5. Because much of the merchandise inventory is produced in Asia, large orders are placed several months prior to peak seasons. Ordering well in advance saves ordering and shipping costs. 6. Accounts payable to suppliers are promptly paid within 30 days. 7. The following information relates to the Income Statement Segmented by Product Line: a) Rent, utilities, depreciation, and property taxes have been allocated equally amongst the 4 product lines. However, if any one of the product lines was eliminated, these costs will remain. b) Details of salaries and commissions follow (payroll fringe benefits are included): i. 3% sales commissions were paid on all sales except for the sales of the Repair & Service department. ii. The two (2) managers are paid $38,000 each per year. Both are responsible for the company as a whole.iii. Besides sales commissions, the four [4] sales clerks are paid $2,500 each per month. They sell all 3 product lines (skis, hikes and accessories]. If any product line is eliminated, the sales clerks will still remain. iv. During the year, the two [2] Repair E: Service technicians combined were paid a total salary of $?0,000 for the whole year and are allocated entirely to the RcS department. Thus, if the department was discontinued, the technicians would not he required. c] Advertising Mountain SporE Ltd. spent advertising on product lines as follows: (-14 For the company as a whole 5 25,000 For the individual product lines: Cross Country Skis '3 33,190 Mountain Bikes 45,500 3 Accessories 5,?00 Repair E: Service 3,550 93,040 Total Advertising I.Cost $123,040 [Ll n. Note: you will observe that the amounts on the income statement differfor the individual product lines due to the allocation of $25,000 in general company advertising cosh. Note: you will observe that the amounts on the income statement differ for the individual product lines due to the allocation of $25,000 in general company advertising Costs. 8. Interest expense has been allocated equally to each product line & Repair & Service department. Interest expense is considered a financing cost which benefits the whole operation. Therefore, they are not traceable to any individual product line or department. 9. Income taxes have been allocated based on sales. Income taxes are calculated after all costs, including common costs have been deducted. Therefore, they are not traceable to any individual product line or department.Income StatementSegmented by Product Line For the Year Ended December 31, 2020 Cross Repair & Country Ski Mountain Service TOTAL Packages Bicycles Accessories Dept. Sales 1,940,401 603,060 820,943 399,605 116,793 Cost of goods sold 826,372 271,377 377,634 159,842 17,519 Gross Profit 1,114,029 331,683 443,309 239,763 99,274 Operating expenses (see note 7) Advertising 123,040 38,240 52,056 25,339 7,406 Depreciation 21,341 5,335 5,335 5,335 5,335 Property taxes 32,000 8,000 8,000 8,000 8,000 Rent 134,807 33,702 33,702 33,702 33,702 Repairs & service expense 94,118 31,124 42,370 20,624 Salaries & commissions 320,710 83,570 83,570 83,570 70,000 Utilities 100,000 25,000 25,000 25,000 25,000 Total Expenses 826,016 224,971 250,032 201,570 149,443 Operating income (loss) 288,013 106,712 193,277 38,193 (50,169) Interest expenses (see note 9) 6,413 1,603 1,603 1,603 1,603 Income (Loss) before taxes 281,600 105,109 191,674 36,590 (51,772) Income tax (see note 10) 78,849 24,506 33,359 16,238 4,746 Net Income (Loss) 202,751 80,604 158,314 20,352 (56,518)
