Data:“I’ll never understand this accounting stuff,” Ricardo Mulliade yelled, wav
ID: 2423934 • Letter: D
Question
Data:“I’ll never understand this accounting stuff,” Ricardo Mulliade yelled, waving the incomestatement he had just received from his accountant in the morning mail. “Last month(February), we sold 1,000 stuffed Edmonds Community College mascots and earned$6,850 in operating income. This month (March), when we sold 1,500, I thought we’dmake $10,275. But his income statement shows an operating income of $12,100! Howcan I ever make plans if I can’t predict my income? I’m going to give Binta one lastchance to explain this to me,” he declared as he picked up the phone to call BintaJallow, his accountant.“Will you try to explain this operating income thing to me one more time?” Ricardoasked Binta. “After I saw last month’s income statement, I thought each mascot wesold generated $6.85 in net income; now this month, each one generates $8.07! Therewas no change in the price we paid for each mascot, so I don’t understand how thishappened. If I had known I was going to have $12,100 in operating income, I wouldhave looked more seriously at adding to our product line.”
REQUIRED:a. Assume Binta’s role. Explain to Ricardo why his use of operating income per
mascot was in error. (5 pts.)
Explanation Assessed (Scale of 1 – 5) 1 2 3 4 5
b. Using the following income statements, prepare a contribution margin incomestatement for March. Hint, use the high-low method to separate the variable andfixed elements of each mixed cost. (5 pts.) ___
February MarchSales Revenue $25,000 $37,500Cost of Goods Sold 10,000 15,000Gross Profit 15,000 22,500Rent Expense 1,500 1,500Wages Expense 3,500 5,000Shipping Expense 1,250 1,875Utilities Expense 750 750Advertising Expense 750 875Insurance Expense 400 400Operating Income $ 6,850 $12,100
c. Ricardo plans to sell 500 stuffed mascots next month. How much operatingincome can Ricardo expect to earn next month if he realizes his planned sales?(5 pts.) ____d. Ricardo wasn’t happy with the projected income statements you showed him fora sales level of 500 stuffed mascots. He wants to know how many stuffedmascots he will need to sell to earn $3,700 in operating income. As a safety net,he also wants to know how many stuffed mascots he will need to sell to break
even. (5 pts.) ____
e. Ricardo is evaluating two options to increase the number of mascots sold nextmonth. First, he believes he can increase sales by advertising in the universitynewspaper. Ricardo can purchase a package of 12 ads over the next month for atotal of $1,200. He believes the ads will increase the number of stuffed mascotssold from 500 to 960. A second option would be to reduce the selling price.Ricardo believes a 10% decrease in the price will result in 1,000 mascots sold.Which plan should Ricardo implement (show calculations)? At what level of saleswould he be indifferent between the two plans? (Hint: At what sales level would
the income from both plans be the same). (10 pts.) _____
f. Just after Ricardo completed an income projection for 1,200 stuffed mascots, hissupplier called to inform him of a 20% increase in cost of goods sold (anincrease from $10.00 per unit to $12.00 per unit), effective immediately. Ricardoknows that he cannot pass the entire increase on to his customers, but thinks hecan pass on half of it while suffering only a 5% decrease in units sold. ShouldRicardo respond to the increase in cost of goods sold with an increase in price?(Hint: Prepare two income statements; one with no increase in sales price andthe other with the increase). (10 pts.) ____
g. Refer back to the original information. Ricardo has decided to add stadiumblankets to his product line. He has found a supplier who will provide theblankets for $32, and he plans to sell them for $55. All other variable costscurrently incurred for selling mascots will be incurred for selling blankets at thesame rate. Additional fixed costs of $350 per month will be incurred. He believeshe can sell one blanket for every three stuffed mascots. How many blankets andstuffed mascots will Ricardo need to sell each month in order to break-even(show calculations)? (Hint: See pgs. 210 – 211 in Chapter Five of your textbook).(5 pts.) ____
h. Participation Points (15 pts.) These points will be allocated based on the activityon each team’s discussion. If you communicate “outside” of the discussion boardplease leave me a note on your team’s discussion board in Canvas detailing whoparticipated in the discussion.
Explanation / Answer
a. While fixed cost has remained the same despite the increase in sales volume, increased sales has led to increased contribution margin, and therefore the operating income which is the gap between contribution margin and fixed cost
( Contribution margin - Fixed cost) has widened. That explains the more than proportionate increase in operating income.
b. Segregation of mixed cost:(equation method)
Wages 1000x + y = 3,500 and 1500 x + y = 5,000. Therefore variable wage cost is $ 3 per unit, and fixed cost is $ 500
Adverising expence: 1000x + y = 750, 1,500 x + y = 875 , Therefore variable advertising cost = $0.25 per unit, anf fixed cost is $ 500
Contribution margin income statement:
c. Contribution margin per unit = 10,500 / 1,000 = $ 10.5
Therefore, on sales of 500 units, contribtion margin = 500 x 10.5 = $ 5,250
Operating income = Contribution margin - fixed cost = 5,250 - 3,650 =$ 1,600
For earning operating income of $ 3,700, sales level must be (3,650 + 3,700) / 10.5 = 700 units
The breakeven point = 3,650 / 10.50 = 348 units
e.
It is evident from the above that Option 1 gives better operating results as compared to Option II.
Sales level at which Ricardo is indifferent between the two options:
Let the sales level be Q
10.50 Q - 3,650 = 8.25Q - 4,350
Or Q= ???
February March Sales revenue 25,000 37,500 Less variable cost Cost of goods sold 10,000 15,000 Direct wages 3,000 4,500 Shipping expense 1,250 1,875 Adverising expense 250 375 Contribution margin 10,500 15,750 Less Fixed cost Wages 500 500 Rent expense 1,500 1,500 Utilities expense 750 750 Advertising expense 500 500 Insurance expense 400 400 Operating income 6,850 12,100Related Questions
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