Question
Cheertime Company produces three lines of greeting cards scented, musical, and regular. There are common fixed expenses of $7,500 (meaning this expense is applied only
Cheertime Company produces three lines of greeting cards scented, musical, and regular. There are common fixed expenses of $7,500 (meaning this expense is applied only 1 time no matter if the company produces one line or all three lines). The additional financial information for all three lines is below: Scented: Sales $10,000 Variable expenses $7,000 Advertising $4,000 Musical: Sales $15,000 Variable expenses $12,000 Advertising $5,000 Regular: Sales $25,000 Variable expenses $12,500 Advertising $3,000 With the current financial information, Cheertime's current operating income is a loss of $1,000. For 2022, the president of Cheertime is considering two alternatives to cut down on losses: 1) completely eliminating the scented and musical card lines which she projects will decrease the sales and variable expenses of the regular greeting card line by 20%. Or 2) Increasing advertising by $250 for the scented line and $750 for the musical line which she projects will increase the sales and variable expenses of BOTH of these lines by 30%. 1. Create (and professionally format) an income statement below for the first alternative. Formulas should be used in the cells for all calculations and proper accounting protocols should be followed. The following items are the accounts for the income statement (they are not listed in order here, but must be in the correct order on your income statement!). (9 points) Sales Operating income Contribution margin Variable expenses Common fixed expenses Advertising 2. Complete (and professionally format) the income statement below for the second alternative. Formulas should be used in the cells for all calculations and proper accounting protocols should be followed. (14 points) Header Needed Header Needed Header Needed Scented Musical Regular Total Sales Variable expenses Contribution margin Advertising Segment margin Common fixed expenses Operating Income 3. Would you recommend that the company keep operations as-is, employ alternative 1, or employ alternative 2? Explain your reasoning. (2 points) 4. Any decision comes with risk. Identify and explain at least one risk that the company could incur from making your decision in #3. (2 points)
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