This is the answer to PART 1:

Step 1 Prepare Contribution Format Income Statement

Mountain Sports Ltd

Contribution Format Income Statement

For the year ending December 31, 2018

Description Total Percentage

Sales $1,957,427 100.0%

Less: Variable cost:

COGS $833,623 42.6%

Salaries and commissions $183,961 9.4%

Repairs & service equipment $94,944 4.9%

Total Variable costs $1,112,528 56.8%

Contribution Margin $844,899 43.2%

Less: Fixed costs:

Advertising and Promotion $98,900

Salaries and commissions $207,199

Rent $48,000

Utilities $100,000

Depreciation $21,528

Property Taxes $32,000

Total Fixed Costs $507,627

Operating Income $337,272

PART 2:

Question 2 Segmented Contribution Margin Income Statement

Part A:(answer in the Excel Solution Workbook file on the Question 2 tab)

In order to resolve product line issues, reformat theabove Segmented Income Statement.

a.Rent, utilities, depreciation,andproperty taxesare Common Fixed Costs and have been allocated equally among the 4 product lines. If any one of the product lines was eliminated, these costs will remain.

b. Details ofsalaries and commissionsfollow:

1. 10% sales commissions were paid on all sales except for the sales of the Repair & Service department.

1. Besides sales commissions, the foursales clerksare paida fixed amount of$1,400 each per month.They sell all three product lines (skis, bikes and accessories), so their salaries are considered common costs.

1. The two managers are paida fixed amount of$40,000 each per year. Both are responsible for thecompany as a whole.

1. During the year, the two Repair & Service technicians combined were paid a totalfixedsalary of $59,999 for the whole year and are traced entirely to the Repair & Service Department.Thus, if the department was discontinued, the technicians would not be required.

Question 2 Segmented Contribution Margin Income Statement(continued)

c.Advertising- all advertising costs are traceable fixed expenses.

d.Cost of Goods Soldvaries with sales activity.

e.TheRepairs and Maintenanceexpenses varies with sales activity for the Cross Country, Mountain Bicycle and Accessories Departments.

NOTE:The revised Income Statement should be consistent with the Contribution Margin Income Statement prepared in Question 1.

Part B:(record answer below)

The owners think they should eliminate the Accessories and the Repairs and Service Departmentsas they are the least profitable.After reformatting the income statement, what do you recommend to the owners and why?

Answer:

I have to fill out ALL the BLANKS.

TOTAL Cross Country Ski Packages Mountain Bicycle Accessories Repair + service dept

Amount % Amount % Amount % Amount % Amount %

Sales BLANK 100% BLANK 100% BLANK 100% BLANK 100%. BLANK 100%

Less: Variable costs

COGS BLANK 42.6% BLANK BLANK BLANK BLANK

Repair and Maintenance BLANK 4.9% BLANK BLANK BLANK BLANK

BLANK BLANK BLANK BLANK BLANK BLANK BLANK

Total Variable cost BLANK BLANK BLANK BLANK BLANK 55.2% BLANK 15.0%

Contribution Margin $844,896 43.2% $242,359 39.8% $321,644 38.8% $180,750 44.8% $100,145 85.0%

Less: Traceable fixed costs:

Repairs+Maintenance Div Salaries BLANK BLANK BLANK BLANK BLANK

BLANK BLANK BLANK BLANK BLANK BLANK

Total traceable fixed costs BLANK BLANK BLANK BLANK BLANK

Segment Margin $685,997 $203,834 $275,644 $175,000 $31,521

Less: Common Fixed Costs

Sales clerk and managers salaries BLANK

BLANK BLANK

BLANK BLANK

BLANK BLANK

BLANK BLANK

Total Common fixed costs BLANK

Operating Income $337,271

NOTE: These numbers could be out by $1 to $3 caused by rounding.