Randy Reseller operates a small shop on the beach that sells a surfboard. After getting his April income statement he Yelled Ill never understand this accounting stuff. Last month (June) we sold 1,000 surfboards and earned $68,500 in operating income. This month (July) we sold 1,500. I thought we would make $102,750. However, his income statement for July shows a net income of $121,000. He is frustrated and says how can I ever make plans if I cant predict my net income. That accountant has some explaining to do. I am giving her one more chance to explain this, as he dials his accountant Alex Figures.

Will you explain this operating income thing to me one more time? Randy ask Alex. After I saw last months income statement, I thought each surfboard we sold generated $68.50 in net income; now this month each one generates $80.67! There was no change in the price we paid for the surfboard, so I dont understand how this happened. If I had known I was going to have $121,000 in operating income, I would have looked more seriously at adding to our product lines.

Required:

1. Assume Alexs roll. Explain to Randy why his use of operating income per surfboard was in error (10 points)

Explanation assessed (Scale of 1 to 5) 1 2 3 4 5

2. Using the following income statements, prepare a contribution margin income statement for July. Hint, used the high-low method to separate the variable and fixed elements where necessary. (10 points______

3.Randy plans to sell 500 surfboards next month (August). How much operating income Randy expect to earn next month if he realizes his planned sales (10 points________

4.Randy wasnt happy with the projected income statements you prepared for him for a sales level of 500 surfboards. He wants to know how many surfboards he will need to sell to earn an operating income of $37,000. As a safety net, he also wants to know how many surfboards must he sell to break-even. (10 points______

5.Randy is evaluating two options that would increase the number of surfboards sold next month. First, he believes he can increase sales by advertising on the local radio station. He can purchase 12 radio spots for the next month for a total of $12,000. He believes the increased advertising will increase the number of surfboard sold from 500 to 960. A second option would be to reduce the selling price. Randy believes a 10% decrease in price will result in 1,000 surf boards sold. Which plan should Randy implement.

Show your calculations for both alternatives. (10 points_______

6. Just after Randy had completed an income projection for 1,200 surfboards, his supplier called to inform him that the cost of surfboards would be going up by 20%, effective immediately. That is, from $100 per unit to $120 per unit. Randy knows that he cannot pass the entire increase on to his customers, but he thinks he can pass on half of the increase while suffering only a 5% reduction in units sold. Should Randy pass the increase onto his customers. (Hint prepare two income statements; one with no increase in sales price and the other with the increase (10 points_________

June $250,000 100,000 150,000 July $375,000 150,000 225,000 Sales Revenue Cost of goods sold Gross Profit Operating expenses Rent expense Wages expense Shipping expense Utilities expense Advertising expense nsurance expense Total Operating expenses 15,000 35,000 12,500 7,500 7,500 4000 81,500 15,000 50,000 18,750 7,500 8,750 4000 104,000 Operating income $121.000