Question

Data:“I’ll never understand this accounting stuff,” RicardoMulliade yelled, waving the incomestatement he had just receivedfrom his accountant in the morning mail. “Last month(February), wesold 1,000 stuffed Edmonds Community College mascots andearned$6,850 in operating income. This month (March), when we sold1,500, I thought we’dmake $10,275. But his income statement showsan operating income of $12,100! Howcan I ever make plans if I can’tpredict my income? I’m going to give Binta one lastchance toexplain this to me,” he declared as he picked up the phone to callBintaJallow, his accountant.“Will you try to explain this operatingincome thing to me one more time?” Ricardoasked Binta. “After I sawlast month’s income statement, I thought each mascot wesoldgenerated $6.85 in net income; now this month, each one generates$8.07! Therewas no change in the price we paid for each mascot, soI don’t understand how thishappened. If I had known I was going tohave $12,100 in operating income, I wouldhave looked more seriouslyat adding to our product line.”

REQUIRED:a. Assume Binta’s role. Explain to Ricardo why his useof operating income per

mascot was in error. (5 pts.)

Explanation Assessed (Scale of 1 – 5) 12 3 4 5

b. Using the following income statements, prepare a contributionmargin incomestatement for March. Hint, use the high-low method toseparate the variable andfixed elements of each mixed cost. (5pts.) ___

February MarchSales Revenue $25,000 $37,500Cost of Goods Sold10,000 15,000Gross Profit 15,000 22,500Rent Expense 1,5001,500Wages Expense 3,500 5,000Shipping Expense 1,250 1,875UtilitiesExpense 750 750Advertising Expense 750 875Insurance Expense 400400Operating Income $ 6,850 $12,100

c. Ricardo plans to sell 500 stuffed mascots next month. Howmuch operatingincome can Ricardo expect to earn next month if herealizes his planned sales?(5 pts.) ____d. Ricardo wasn’t happywith the projected income statements you showed him fora saleslevel of 500 stuffed mascots. He wants to know how manystuffedmascots he will need to sell to earn $3,700 in operatingincome. As a safety net,he also wants to know how many stuffedmascots he will need to sell to break

even. (5 pts.) ____

e. Ricardo is evaluating two options to increase the number ofmascots sold nextmonth. First, he believes he can increase sales byadvertising in the universitynewspaper. Ricardo can purchase apackage of 12 ads over the next month for atotal of $1,200. Hebelieves the ads will increase the number of stuffed mascotssoldfrom 500 to 960. A second option would be to reduce the sellingprice.Ricardo believes a 10% decrease in the price will result in1,000 mascots sold.Which plan should Ricardo implement (showcalculations)? At what level of saleswould he be indifferentbetween 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 1,200stuffed mascots, hissupplier called to inform him of a 20% increasein cost of goods sold (anincrease from $10.00 per unit to $12.00per unit), effective immediately. Ricardoknows that he cannot passthe entire increase on to his customers, but thinks hecan pass onhalf of it while suffering only a 5% decrease in units sold.ShouldRicardo respond to the increase in cost of goods sold with anincrease in price?(Hint: Prepare two income statements; one with noincrease in sales price andthe other with the increase). (10 pts.)____

g. Refer back to the original information. Ricardo has decidedto add stadiumblankets to his product line. He has found a supplierwho will provide theblankets for $32, and he plans to sell them for$55. All other variable costscurrently incurred for selling mascotswill be incurred for selling blankets at thesame rate. Additionalfixed costs of $350 per month will be incurred. He believeshe cansell one blanket for every three stuffed mascots. How many blanketsandstuffed mascots will Ricardo need to sell each month in order tobreak-even(show calculations)? (Hint: See pgs. 210 – 211 in ChapterFive of your textbook).(5 pts.) ____

h. Participation Points (15 pts.) These points will be allocatedbased on the activityon each team’s discussion. If you communicate“outside” of the discussion boardplease leave me a note on yourteam’s discussion board in Canvas detailing whoparticipated in thediscussion.