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 Edmonds Community 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.) ___

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. Participation Points (20 pts.) Ill award these points by looking at the activity on each

teams discussion board. If you use some other means of communicating please

post a note on your teams discussion board indicating who in the team participated.

FebruaryMarch $25,000$37,500 Sales Revenue Cost of Goods Sold10,00015,000 Gross Profit Rent Expense Wages Expense Shipping Expense Utilities Expense Advertising 15,00022,500 1,5001,500 3,5005,000 1,2501,875 750 750 750 875 Expense Insurance Expense 400 400 ating Income 6,850 $12,100 FebruaryMarch $25,000$37,500 Sales Revenue Cost of Goods Sold10,00015,000 Gross Profit Rent Expense Wages Expense Shipping Expense Utilities Expense Advertising 15,00022,500 1,5001,500 3,5005,000 1,2501,875 750 750 750 875 Expense Insurance Expense 400 400 ating Income 6,850 $12,100