Hello,

Could you please help me solve this problem? I am so lost on how to figure this out, this asssignment is for my Managerial Accounting class. I would greatly appreciate it. Thank you so much,

Chapter 5- CVP Analysis

Rayburn Co. manufactures and sells glow in the dark phone cases. Terry Andrei kowski, the president of the Rayburn Co., has a hard time understanding the accounting in his firm. Yesterday morning, he was very confused when he received mail from his accountant, Julia Omberg. She sent him the following income statements:

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 Expepnse 750 750

Advertising Expense 750 875

Insurance Expense 400 400

Total Operating Income: $ 6,850 $ 12,100

Terry was somewhat frustrated and said "Last month, we sold 1,000 glow in the dark phone cases and earned $6,850 in operating income. This month, when we sold 1,500 cases, I thought we'd make $10,275. This income statement shows an operating income of $12,100 ! How can I ever make any plans when I can't even predict my income? This accounting non-sense is too confusing! I will give Julia one last chance to explain to me what's going on."

"Can you please try to explain this operating income non-sense to me once more?" Terry asked Julia on the phone. Terry said: "After I saw last month's income statement, I thought each glow in the dark case generated $6.85 in net income; now this month each one generates $8.07! No changes took place in the cost of each case, so why does this change in operating income happen? If I had known I was going to have a higher operating income, I would've looked more seriously at adding to our product line!"

After patiently listening to Terry's blab, and taking a deep breath, Julia answers: "Of course, Terry. Let me explain to you again how you made so much more operating income than what you were expecting."

Required:

HINT:Consider whether each expense if fixed or variable. You can assume $500 of wages is a fixed expense, utilities are fixed (on a monthly payment plan where they pay the same amount each month), and that $500 of the advertising is fixed.

a)Assume Julia's role. Explain to Terry why his use of operating income per mascot was in error.

b)Terry plans to sell 500 glow in the dark phone cases next month. How much operating income can Terry expect to earn next month if he realizes his planned sales?

c)Terry was not at all happy with the projected income statement you showed him for a sales level of 500 cases. Now he wants to know how many glow in the dark cases he needs to sell to earn $3,700 in operating income. As a safety net, he would like to know how many phone cases he will need to sell to break even.

d)Right after Terry completed an income projection for 1,200 glow in the dark phone cases, his supplier informed him of a 20% increase in cost of goods sold, effective immediately. Terry knows that he cannot pass the entire increase on to his customers, but he thinks he can pass on half of the 20% increase while suffering only a 5% decrease in units sold. Should Terry respond to the increase in cost of goods sold with an increase in price?