“I’ll never understand this accounting stuff,” Ricardo Mulliade yelled, waving t
ID: 2424316 • Letter: #
Question
“I’ll never understand this accounting stuff,” Ricardo Mulliade yelled, waving the income statement 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’d make $10,275. But his income statement shows an operating income of $12,100! How can I ever make plans if I can’t predict my income? I’m going to give Binta one last chance to explain this to me,” he declared as he picked up the phone to call Binta Jallow, his accountant.
“Will you try to explain this operating income thing to me one more time?” Ricardo asked Binta. “After I saw last month’s income statement, I thought each mascot we sold generated $6.85 in net income; now this month, each one generates $8.07! There was no change in the price we paid for each mascot, so I don’t understand how this happened. If I had known I was going to have $12,100 in operating income, I would have looked more seriously at adding to our product line.”
REQUIRED: PROCESS PLEASSE!!!!!!!
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
c) Ricardo plans to sell 500 stuffed mascots next month. How much operating income 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 for a sales level of 500 stuffed mascots. He wants to know how many stuffed mascots 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 next month. First, he believes he can increase sales by advertising in the university newspaper. Ricardo can purchase a package of 12 ads over the next month for a total of $1,200. He believes the ads will increase the number of stuffed mascots sold 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 sales would 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, his supplier called to inform him of a 20% increase in cost of goods sold (an increase from $10.00 per unit to $12.00 per unit), effective immediately. Ricardo knows that he cannot pass the entire increase on to his customers, but thinks he can pass on half of it while suffering only a 5% decrease in units sold. Should Ricardo 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 and the other with the increase). (10 pts.) ____
g) Refer back to the original information. Ricardo has decided to add stadium blankets to his product line. He has found a supplier who will provide the blankets for $32, and he plans to sell them for $55. All other variable costs currently incurred for selling mascots will be incurred for selling blankets at the same rate. Additional fixed costs of $350 per month will be incurred. He believes he can sell one blanket for every three stuffed mascots. How many blankets and stuffed 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.) ____
February March Sales Revenue $25,000 $37,500 Cost of Goods Sold10,00015,000 Gross Profit Rent Expense 15,00022,500 1,5001,500 3,5005,000 1,2501,875 750 875 400 Wages Expense Shipping Expense 750 Utilities Expense Advertising Expense 750 Insurance Expense Operating Income 6,850 $12,100 400Explanation / Answer
Particulars
Feb
%
Mar
%
Type of Exp
Sales Revenue
25,000
37,500
Less: COGS
10,000
40
15,000
40
Variable
Gross Profit
15,000
22,500
Rent Exp
1,500
1,500
Fixed
Wages
3,500
14.00
5,000
13.33
Semivarible
Shipping Exp
1,250
5.00
1,875
5.00
Variable
Utilities Exp
750
750
Fixed
Adv Exp
750
3
875
2.333333
Ins
400
400
Fixed
Total Exp
8,150
10,400
Ope income
6,850
12,100
b.
With this computation it is proved that COGS and shipping exp are variable
And Rent ,utilities and Insurance fixed
Wages are semi variable
Let us use high-low method to find out fixed and variable cost
= difference between exp at two levels/difference between two levels
=$5000-$3500/1500-1000 =3per unit
Hence fixed cost=total cost – variable cost
= $3500-[3x 1000]
=$3500-3000=$500
Wages are advertisement variable
Let us use high-low method to find out fixed and variable cost
= difference between exp at two levels/difference between two levels
=$875-$750/1500-1000=125/500=0.25
Hence fixed cost=total cost – variable cost
= $750-[0.25x 1000]
=$750-$250=500
C. Sales price per unit=$25,000/1000=$25
Variable cost per unit
Cogs=$10,000/1000=10
Shipping Exp=$1250/1000=1.25
Wages = $3 as computed
Sales Units
500
Particulars
Feb
Sales Revenue
25.00
Less: Variable Cost
COGS
10.00
Shipping Exp
1.25
Wages
3.00
Adv Exp
0.25
Total Variable cost
14.50
Contribution per unit
10.50
Total Contribution
5,250.00
Less Fixed Cost
Rent Exp
1,500.00
Wages
500.00
Utilities Exp
750
Adv Exp
500.00
Ins
400.00
Total Fixed Exp
3,650.00
Operating Income
1,600.00
d.
Target sales in units=Target profit+ Fixed cost/ Contribution per unit
=3700+3650/10.5
=700 units
Break even units=Fixed cost/ contribution per uinit=3650/10.5=348 units
e. Option 1
new sales in units=960 units
Sale price=25
New Advertisement exp for 960 units $1200
In this fixed is $500
Hence variable cost per unit=1200-500=1700/960=0.75 rounded off means 0.50 increase
Hence variable cost increased from 14.5 to 15
New contribution per unit=25-15=10
New contribution=960 x 10=$9600
Fixed cost =3650+500=4150
Operating Income=9600-4150=5450
Option 2
new sales in units=1000 units
new Sale price=25 x 90%=22.5
New contribution per unit=22.5-14.5=8
new contribution=1000 x 8=$8000
Fixed cost =3650
Operating Income=8000-3650=4350
Indifferece Point= Difference between fixed cost/ difference between variable cost
=$4150-3650/15-14.5=
=500/.5=1000 units
f. News sales with 5% decrease=1200 x 95%=1140 units
$ 2 increase in cogs
Half passing to customer means $1 increase in sale price $25+$1=$26
New Variable cost =14.5 +2=16.5
New contribution per unit=26-16.5=9.5
Total contribution=9.5 x 1140=$10830
Fixed cost=3650
Operating profit=$100830-3650=7180
Yes can go with increase in COGS
g.
Sales price=55
Variable cost=32+14.5=46.5
Contribition per blanket =55-46.5=8.5
Combined fixed cost=3650+350=$4000
Combined contribution= contribution per 3 mascots + contribution per blanket
=10.5 x 3 + 8.5
=31.5 +8.5=40
Break even point=fixed cost/contribution per unit=$4000/40=4000
Means 3000 mascots and 1000 blankets
Particulars
Feb
%
Mar
%
Type of Exp
Sales Revenue
25,000
37,500
Less: COGS
10,000
40
15,000
40
Variable
Gross Profit
15,000
22,500
Rent Exp
1,500
1,500
Fixed
Wages
3,500
14.00
5,000
13.33
Semivarible
Shipping Exp
1,250
5.00
1,875
5.00
Variable
Utilities Exp
750
750
Fixed
Adv Exp
750
3
875
2.333333
Ins
400
400
Fixed
Total Exp
8,150
10,400
Ope income
6,850
12,100
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