Question

Lively Bubbles, Inc., produces multicolored bubble solution used for weddings and other events. The company’s master budget income statement for July follows. It is based on ­expected sales volume of 45,000 bubble kits.
LIVELY BUBBLES, INC. Master Budget Income Statement Month Ended July 31
Sales revenue ................................................................ $ 137,250
Variable expenses:
Cost of goods sold ............................................... $ 56,250
Sales commissions ................................................ 6,750
Utility expense ..................................................... 9,000
Fixed expenses: Salary expense................................ 30,000
Depreciation expense ........................................... 20,000
Rent expense........................................................ 10,000
Utility expense ..................................................... 4,000
Total expenses.............................................................. $ 136,000
Operating income......................................................... $ 1,250

Lively Bubbles’ plant capacity is 52,500 kits. If actual volume exceeds 52,500 kits, the company must expand the plant. In that case, salaries will increase by 10%, depreciation by 15%, and rent by $ 5,000. Fixed utilities will be unchanged by any volume increase.

Requirements
1. Prepare flexible budget income statements for the company, showing output levels of 45,000, 50,000, and 55,000 kits.
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.
3. Why might Lively 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?



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  • CreatedAugust 27, 2014
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