ul
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 Average selling price per bike Purchase cost (COGS) per bike Assembly cost per bike Sales clerks required - seasonal Monthly Salary per Sales Clerk Sales commissions Advertising campaign (annual cost) 360 $ 370.00 $ 112.00 $ 60.00 2 $ 1,202 14% $ 5,860 The additional sales clerks required for the BMX line will only work for four months of the year (May to August). Notes Mountain Sports Ltd. Segmented Income Statement For the Year Ended Dec 31, 2019 Cross Country Ski Packages Mountain Bikes 696.855) 729,322 47% 47% 330.309 346 209 366.546 TOTAL 1,934,320 Accessories 364,231 29% 105,663 258,568 Parts & Service 143 912 17% 24,681 119,231 806,863 1,127,457 383 113 1 37,044 5,989 2 3 9,836 Sales Cost of goods sold % Cost of goods sold Gross Profit Operating expenses Advertising Depreciation Property taxes Rent Parts & service expense Salaries & commissions Utilities Total Operating Expenses Operating income (loss) Interest expense Income (Loss) before taxes Income tax Net Income (Loss) 4 5 6 7 28,343 38.321 116,950 27.367 263.850 102 696 1.750 100,946 17,812 $83. 134 41,279 5,989 9,836 28,343 40.107 116,9501 27.367 269,870 113 243 1.750 111,493 18 642 $92.851 10,636 5,989 9,836 28,343 20,030 116,950 27,367 219 151 39,417 1,750 37,667 9.310 $28.357 9,042 5,989 9,836 28,343 0 81,000 27,367 161,577 -42,346 1.750 -44 0961 3,678 -$47.774 98,000 23,955 39,344 113,373 98,458 431,849 109,469 914,448 213,009 7.000 206,009 49,442 $156.567) 8 24.00% 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). Increase in Accessories Sales Decrease in Mountain Bikes Sales 14% 6% 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). Increase in BMX Segment Margin $ Increase in Contribution Margin - Accessories Decrease in Contribution Margin - Mountain Bikes (show as negative number) NET Increase (Decrease) in Operating Income DECISION: Should the company add the BMX bike produd Why or why not
