Lasting Bubbles, Inc., produces multicoloured bubble solution used for weddings and other events. The company's static budget

Question:

Lasting Bubbles, Inc., produces multicoloured bubble solution used for weddings and other events. The company's static budget income statement for August is as follows.

It is based on expected sales volume of 55,000 bubble kits.

LASTING BUBBLES, INC.

Static Budget Income Statement

Sales revenue .........................................................................................$165,000

Variable expenses:

Cost of goods sold ....................................................................................63,250

Sales commissions ...................................................................................13,750

Utilities expense ......................................................................................11,000

Fixed expenses:

Salary expense.........................................................................................32,000

Depreciation expense ............................................................................20,000

Rent expense...........................................................................................11,000

Utilities expense .......................................................................................5,000

Total expenses.......................................................................................156,000

Operating income..................................................................................$9,000

Lasting 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 $5,800. Fixed utilities will be unchanged by any volume increase.

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 behaviour of the company's total costs.

3. Why might Lasting 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?