CASE/PROBLEM

?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.?

1.Using the following income statements, prepare a contribution margin income statement for March. (Hint, use the high-low method to separate the variable and fixed elements of each mixed cost.)

	February	March
Sales Revenue	$25,000	$37,500
Cost of Goods Sold	10,000	15,000
Gross Profit	15,000	22,500
Rent Expense	1,500	1,500
Wages Expense	3,500	5,000
Shipping Expense	1,250	1,875
Utilities Expense	750	750
Advertising Expense	750	875
Insurance Expense	400	400
Operating Income	$ 6,850	$12,100

2. 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.) _____

3.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).

*I asked this question twice to two different tutors, and I got different answers from them. I want to make sure which one is correct one!!*

This one is what I got from the college tutor, and here's only part 1, and she said there must be more information to solve part 2.

• Part 1: First Income Statement w/ NO increase in sales price?

Edmonds College Mascots Income Statement For the Month of ________:
Sales (1,200 units x $25)	$30,000
Cost of Goods Sold (1,200 units x $12)	$14,400
Less: Variable Expenses
Shipping Expense	$1,875
Wages Expense	$4,500
Advertising Expense	$375
Contribution Margin	$8,850
Less: Fixed Expenses
Rent Expense	$1,500
Utilities Expense	$750
Insurance Expense	$400
Wages Expense	$500
Advertising Expense	$500
Net Income	$5,200

I attached what I got from another coursehero tutor!! However, even though this is correct one, I do not know why he used 1200 units and 1140 units. Please be specific and show all calculations!

February March Sales Revenue $25,000 $37,500 Cost of Goods Sold 10,000 15,000 Gross Profit 15,000 22,500 Rent Expense 1,500 1,500 Wages Expense 3,500 5,000 Shipping Expense 1,250 1,875 Utilities Expense 750 750 Advertising Expense 750 875 Insurance Expense 400 400 Operating Income $6,850 $12,100 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 g (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 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 good increase in price? (Hint: Prepare two income statements; one with no increase in sales price and the other with the increase). Sales Revenue Cost of Goods Sold Gross Profit Rent Expense Wages Expense Shipping Expense Utilities Expense Advertising Expense Insurance Expense Operating Income 1200 units 30,000 (14,400) 15,600 1,500 4,100 1,500 750 800 400 6,550 1140 units 31,200 (14,400) 16,800 ### 3,920 1,425 ### 785 ### 8,020 Yes, Ricardo must respond to the increase in cost of goods sold with an increase in price as it increases the operating income. Calculation of variable and fixed expenses Wages expense 1500 500 Variable Feb Variable Fixed Shipping expense 625 500 Variable Feb Variable Utilities expense 3 Per unit March 3000 4500 500 500 1.25 Per unit March 1250 1875 Feb March 750 750 Advertising expense 125 500 Variable 0.25 Per unit March 250 375 500 500 Feb Variable Fixed t of goods sold his customers, goods sold with an