Outrageous Bubbles, Inc., produces multicolored bubble solution used for weddings and other events. The company's master budget income statement for March follows. It is based on expected sales volume of 55,000 bubble kits.

Outrageous Bubbles' plant capacity is 62,500 kits. If actual volume exceeds 62,500 kits, the company must expand the plant. In that case, salaries will increase by 10%, depreciation by 15%, and rent by $4,000. Fixed utilities will be unchanged by any volume increase.
Requirements
1. Prepare flexible budget income statements for the company, showing output levels of 55,000, 60,000, and 65,000 kits.
2. Graph the behavior of the company's total costs. Use total costs on the y-axis and volume (in thousands of bubble kits) on the x-axis.
3. Why might Outrageous Bubbles' managers want to see the graph you prepared in Requirement 2 as well as the columnar format analysis in Requirement 1? What is the disadvantage of the graphic approach?

Transcribed Image Text:

OUTRAGEOUS BUBBLES, INC. Master Budget Income Statement Month Ended March 31 $170,500 Sales revenue. Variable expenses: Cost of goods sold $ 68,750 Sales commissions.. 13,750 Utility expense . Fixed expenses: Salary expense .. Depreciation expense . 5,500 30,000 20,000 15,000 Rent expense... Utility expense Total expenses . Operating income. 7,000 $160,000 $ 10,500