Question 3 - Product line Analysis (33 marks) G H 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 2 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) 470 $365.00 $ 149.00 $ 60.00 2 $ 1,393 13% $ 5,602 The additional sales clerks required for the BMX line will only work for four months of the year (May to Required: Part A (Chapter 6) (13 marks): Prepare a Pincome statement (for a one year period) to determine the segment margin for the new BMX Bikes product line. BMX Product Line Budgeted CVP Income Statement For the year ended December 31, 2020 TOTAL Per Bike Percentage General B 18 WCVETI For the year ended December 31, 2020 19 TOTAL Per Bike Percentage 20 Number of Bikes 470 21 Sales Revenue S171,550 $ 36500 100% 22 Less: Variable Costs (must be listed alphabetically) 23 Assembly 28,200 60.00 16% 24 70.030 149.00 25 Sales Commissions 22,302 4745 1396 26 Total Variable Costs 120,532 256 AS 70 51.019 27 Contribution Margin 28 Less: Fixed Costs (must be listed alphabetically) 5,602 29 Advertising 30 Salaries 2,786 31 Total Fixed Cost 8,388 32 BMX SEGMENT MARGIN 42.631 3 4 Required Part B (Chapter 6 & 7) (8 marks): This new BMX bike product line will create an increase in sales of two departments: Accessories, and Parts & Service (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 ber that variable costs will also change when sales change), mwever, due to the floor - U my 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 Increase in Parts & Service Sales Decrease in Mountain Bikes Sales 10% 14% 5% 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 $ 42,631 Increase in Contribution Margin - Accessories Increase in Contribution Margin - Parts & Service Decrease in Contribution Margin - Mountain Bikes (show as negative number) 5 NET Increase (Decrease) in Operating Income DECISION: Should the company add the BMX bike product line? Why or why not? Question 3 - Product line Analysis (33 marks) G H 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 2 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) 470 $365.00 $ 149.00 $ 60.00 2 $ 1,393 13% $ 5,602 The additional sales clerks required for the BMX line will only work for four months of the year (May to Required: Part A (Chapter 6) (13 marks): Prepare a Pincome statement (for a one year period) to determine the segment margin for the new BMX Bikes product line. BMX Product Line Budgeted CVP Income Statement For the year ended December 31, 2020 TOTAL Per Bike Percentage General B 18 WCVETI For the year ended December 31, 2020 19 TOTAL Per Bike Percentage 20 Number of Bikes 470 21 Sales Revenue S171,550 $ 36500 100% 22 Less: Variable Costs (must be listed alphabetically) 23 Assembly 28,200 60.00 16% 24 70.030 149.00 25 Sales Commissions 22,302 4745 1396 26 Total Variable Costs 120,532 256 AS 70 51.019 27 Contribution Margin 28 Less: Fixed Costs (must be listed alphabetically) 5,602 29 Advertising 30 Salaries 2,786 31 Total Fixed Cost 8,388 32 BMX SEGMENT MARGIN 42.631 3 4 Required Part B (Chapter 6 & 7) (8 marks): This new BMX bike product line will create an increase in sales of two departments: Accessories, and Parts & Service (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 ber that variable costs will also change when sales change), mwever, due to the floor - U my 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 Increase in Parts & Service Sales Decrease in Mountain Bikes Sales 10% 14% 5% 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 $ 42,631 Increase in Contribution Margin - Accessories Increase in Contribution Margin - Parts & Service Decrease in Contribution Margin - Mountain Bikes (show as negative number) 5 NET Increase (Decrease) in Operating Income DECISION: Should the company add the BMX bike product line? Why or why not