Data: Ill 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 EC College mascots and earned $6,850 in operating income. This month (March), when we sold 1,500, I thought wed make $10,275. But his income statement shows an operating income of $12,100! How can I ever make plans if I cant predict my income? Im 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 months 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 dont 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. REQUIRED:

a. Assume Bintas role. Explain to Ricardo why his use of operating income per mascot was in error. (5 pts.) Explanation Assessed (Scale of 1 5) 1 2 3 4 5

b. 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. (5 pts.) ___ 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

c. Ricardo plans to sell 500 stuffed mascots next month. How much operating income can Ricardo expect to earn next month if he realizes his planned sales? (5 pts.) ____

d. Ricardo wasnt happy with the projected income statements you showed him for a sales level of 500 stuffed mascots. He wants to know how many stuffed mascots he will need to sell to earn $3,700 in operating income. As a safety net, he also wants to know how many stuffed mascots he will need to sell to break even. (5 pts.) ____

e. 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.) _____

f. 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). (10 pts.) ____

g. Refer back to the original information. Ricardo has decided to add stadium blankets to his product line. He has found a supplier who will provide the blankets for $32, and he plans to sell them for $55. All other variable costs currently incurred for selling mascots will be incurred for selling blankets at the same rate. Additional fixed costs of $350 per month will be incurred. He believes he can sell one blanket for every three stuffed mascots. How many blankets and stuffed mascots will Ricardo need to sell each month in order to break-even (show calculations)?(5 pts.) ____ please show work, Thank you