Everlasting Bubbles produces multicolored bubble solution used for weddings and other events. Everlasting Bubbles' plant capacity is 62,500 kits. If actual volume exceeds 62,500 kits, the company must expand the plant. In that case, salaries will increase by 10%, depreciation by 15%, and rent by $4,000. Fixed utilities will be unchanged by any volume increase. The company's master budget income statement for January follows. It is based on expected sales volume of 55,000 bubble kits.
EVERLASTING BUBBLES, INC.
Master Budget Income Statement
Month Ended January 31
Sales revenue ................................................................ $170,500
Variable expenses:
Cost of goods sold............................................................ 68,750
Sales commissions............................................................ 13,750
Utility expense.................................................................... 5,500
Fixed expenses:
Salary expense.................................................................. 30,000
Depreciation expense........................................................ 20,000
Rent expense..................................................................... 15,000
Utility expense.................................................................... 7,000
Total expenses............................................................... $160,000
Operating income............................................................$ 10,500
Requirements
1. Prepare flexible budget income statements for the company, showing output levels of 55,000, 60,000, and 65,000 kits.
2. Graph the behavior of the company's total costs.
3. Why might Everlasting 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?