Happy Bubbles, Inc., produces multicolored bubble solution used for weddings and other events. Click the icon to view the master budget income statement.) Happy 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. The company's master budget income statement for May follows. It is based on expected sales volume of 55,000 bubble kits. Happy Bubbles, Inc. Master Budget Income Statement Month Ended May 31 $ Sales revenue. 159,500 Variable expenses: Cost of goods sold $ 68,750 Sales commissions 11,000 Utility expense 8,250 Fixed expenses Salary expense 30,000 Depreciation expense 20,000 Rent expense 11,000 6,000 Utility expense $ 155,000 Total expenses $ 4,500 Operating income . Requirement 1. Prepare flexible budget income statements for the company, showing output levels of 55,000, 60,000, and 65,000 kits. (Enter the per unit information to two decimal places.) Happy Bubbles, Inc. Flexible Budget Income Statement Month Ended May 31 Flexible Budget per Output Unit Output Units (Kits) 60,000 65,000 55,000 Sales revenue Variable expenses Cost of goods sold Sales commissions Utility expense Fixed expenses Salary expense Depreciation expense Rent expense Utility expense Total expenses Operating income (After you hit continue the screen may take you below the beginning of the next step. If so, scroll back up to the top of the step.) Requirement 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. Begin by plotting the total costs for volume levels of 55,000, 60,000, and 65,000 kits. (Enlarge the graph to medium size and use the point tool button displayed to draw the graph.) 220,000+ Dollars 50,000 85 Volume in Thousands of Bubble Kits Click to enlarge graph (After you hit continue the screen may take you below the beginning of the next step. If so, scroll back up to the top of the step.) Graph the flexible budget total cost line for Happy Bubbles. Due to the different costs at the volume level of 62,500 there will be two total cost linesone line is used for quantities up to 62,500 and the other is used for quantities above 62,500. When drawing the line for the quantities above 62,500, be sure to plot one point of the line at 0 quantity and at the fixed cost including the plant expansion. Then the next point of the line is for the quantity 65,000 and the total cost associated with this quantity. (Enlarge the graph to medium size and use the line tool button displayed to draw the graph.) 220,000 Dollars 50,000 85 Volume in Thousands of Bubble Kits Click to enlarge graph Requirement 3. Why might Happy 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? The advantage of the graph in the previous step is that Happy Bubbles' managers can look at the graph to estimate at any output level 85,000 bubble kits, not just the three levels shown in the columnar format in the first step. The disadvantage of the graph is that looking at the graph provides v of the budgeted cost
