Frieda’s Fabulous Flower Fantasies Frieda’s Fabulous Flower Fantasies sells flow

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Frieda’s Fabulous Flower Fantasies

Frieda’s Fabulous Flower Fantasies sells flowers and other floral items. Her monthly income statement is reflected below. Frieda is not happy with her miniscule operating income.

Monthly

Sales   (602 Customers @ $50) $30,100

Cost of Goods Sold                       6,020          

Gross Profit                                 $24,080

Operating Expenses                      24,020

Operating Income                        $       60

Cost of Goods Sold is a variable cost. Also, another $6,020 of variable costs are included in the operating expenses. The remainder of the operating expenses is a fixed cost.

A Consultant has recommended that an extra $1,000 expenditure each month on promotional activities will double Frieda’s Sales. Frieda’s response:

“Are you crazy? If I double my sales, my operating income will double from $60 to $120 each month. And I will have spent another $1,000. What kind of consulting school did you go to?”

Required: Evaluate the Consultant’s recommendation and Frieda’s response. Clearly indicate what Frieda should do and justify your recommendation with an appropriate report or documentation.

Explanation / Answer

Freida is wrong. Doubling the sales will increase operating income to $ 17,120 as per explanation below. Explanation New Sales (602*2*50) $        60,200 Cost of goods sold(6020*2) $        12,040 Gross profit $        48,160 Operating expenses(6020*2+(24020-6020)) $        30,040 Promotional activities $          1,000 Operating Income $        17,120

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