Great Bubbles, Inc., produces multicolored bubble solution used for weddings and other events. The company's static budget income statement for March follows. It is based on expected sales volume of 65,000 bubble kits.
GREAT BUBBLES, INC.
Master Budget Income Statement
Month Ended March 31
Sales revenue ................................................................ $188,500
Variable expenses:
Cost of goods sold......................................................... $ 81,250
Sales commissions............................................................ 19,500
Utility expense.................................................................... 3,250
Fixed expenses:
Salary expense.................................................................. 30,000
Depreciation expense ....................................................... 20,000
Rent expense...................................................................... 8,000
Utility expense................................................................... 6,000
Total expenses.............................................................. $168,000
Operating income...........................................................$ 20,500
Great 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 $4,000. Fixed utilities will be unchanged by any volume increase.
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 behavior of the company's total costs.
3. Why might Great 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?