Creative Bubbles produces multicoloured bubble solution used for weddings and other events.
Creative Bubbles' plant capacity is 72,500 kits. If actual volume exceeds 72,500 kits, the company must expand the plant. In that case, salaries will increase by 10%, depreciation by 15%, and rent by $6,000. Fixed utilities will be unchanged by any volume increase.
The company's static budget income statement for December follows. It is based on expected sales volume of 65,000 bubble kits.
______________________________Creative Bubbles, Inc.
_________________________Static Budget Income Statement
____________________________Month Ended December 31
Sales revenue .........................................................................................$201,500
Variable expenses:
Cost of goods sold ......................................................................................81,250
Sales commissions ......................................................................................13,000
Utilities expense ............................................................................................9,750
Fixed expenses:
Salary expense..............................................................................................33,000
Depreciation expense ..................................................................................18,000
Rent expense...................................................................................................9,000
Utilities expense .............................................................................................3,000
Total expenses.............................................................................................167,000
Operating income........................................................................................$34,500
Requirements
1. Prepare flexible budget income statements for the company, showing output levels of
65,000, 70,000, and 75,000 kits.
2. Graph the behaviour of the company's total costs.
3. Why might Creative 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?