Question

Great Bubbles, Inc., produces multicolored bubble solution used for weddings and other events. (Click the icon to view the master budget income statement) 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 $6,000. Foxed 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. Use total costs on the y-axis and volume (in thousands of bubble kits) on the x-acis. 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? Requirement 1. Prepare flexible budget income statements for the company, showing output levels of 65,000, 70,000, and 75,000 kits (Enter the per unit information to two decimal places.) Great Bubbles, Inc. Flexible Budget Income Statement Month Ended May 31 Flexible Budget per Output Unit Output Units (Kits) Enter any number in the edit fields and then click Check Answer

Answer 1

Solution :

Requirement 1:

Flexible Budget Income Statement at 65000, 70000 and 75000 output levels

Items	65,000 kits	70,000 kits	75,000 kits
Sales Revenue (A)	201,500	217,000	232,500
Variable expenses:
Cost of Goods Sold	81,250	87,500	93,750
Sales Commissions	13,000	14,000	15,000
Utility expenses	9,750	10,500	11,250
Fixed expenses:
Salary expense	33,000	33,000	36,300*i
Depreciation expense	18,000	18,000	20,700*ii
Rent expense	9,000	9,000	15,000*iii
Utility expense	3,000	3,000	3,000
Total expenses(B)	1,67,000	175,000	195,000
Operating Income (A-B)	34,500	42,000	37,500

Note: Sales Revenue for 70,000 kits is calculated as follows

=(201500/65000 kits) * 70, 000 kits = 217,000

For 75,000 kits =(201500/65000 kits) * 75,000 kits= 232,500

Similarly values of all items for 70,000 and 75,000 kits should be calculated using 65,000 kits values.

Note : At 75,000 kits the following adjustments are made

* i : Salary expenses will increase by 10% = 33,000+10%=36,300

*ii : Depreciation expense will increase by 15% =

18,000+15%= 20,700

*iii : Rent will increase by 6000 = 9000+6000=15,000

Requirement 2:

   See the attached image for Graph

Total Cost 200000 198000 196000 194000 192000 190000 188000 186000 184000 182000 180000 178000 176000 174000 172000 170000 168000 166000 164000 162000 65000 75000 70000 Sales Volume in kits