80.2K

Verified Solution

Link Copied!

Happy Bubbles, Inc., produces multicolored bubble solution used for weddings and other events.

The company's master budget income statement for March follows. It is based on expected sales volume of 55,000 bubble kits.

Happy Bubbles, Inc.
Master Budget Income Statement
Month Ended March 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

Happy 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.

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. Use total costs on the y-axis and volume (in thousands of bubble kits) on the x-axis.
3.	Why might Happy 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 55,000, 60,000, and

65,000 kits. (Enter the per unit information to two decimal places.)

Happy Bubbles, Inc.
Flexible Budget Income Statement
Month Ended March 31
		Flexible
		Budget
		per Output
		Unit	Output Units (Kits)
			55,000	60,000	65,000
	Sales revenue
	Variable expenses:
	Cost of goods sold
	Sales commissions
	Utility expense
	Fixed expenses:
	Salary expense
	Depreciation expense
	Rent expense
	Utility expense
	Total expenses
	Operating income

(After you hit continue the screen may take you below the beginning of the next step. If so, scroll back up to the top of the step.)

Requirement 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-axis.

Begin by plotting the total costs for volume levels of 55,000, 60,000, and 65,000

kits. (Enlarge the graph to medium size and use the point tool button displayed to draw the graph.)

08550,000220,000Volume in Thousands of Bubble KitsDollars

interactive graphClick to enlarge graph

(After you hit continue the screen may take you below the beginning of the next step. If so, scroll back up to the top of the step.)

Graph the flexible budget total cost line for Happy Bubbles. Due to the different costs at the volume level of 62,500 there will be two total cost

lines one line is used for quantities up to 62,500 and the other is used for quantities above 62,500. When drawing the line for the quantities above 62,500,

be sure to plot one point of the line at 0 quantity and at the fixed cost including the plant expansion. Then the next point of the line is for the quantity 65,000

and the total cost associated with this quantity. (Enlarge the graph to medium size and use the line tool button displayed to draw the graph.)

08550,000220,000Volume in Thousands of Bubble KitsDollars

interactive graphClick to enlarge graph

Requirement 3. Why might Happy

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?

The advantage of the graph in the previous step is that Happy Bubbles' managers can look at the graph to estimate

(fixed expenses; operating income; sales revenue; total expenses; variable expenses) at any output level (above; up to) 65,000

bubble kits, not just the three levels shown in the columnar format in the first step. The disadvantage of the graph is that looking at the graph provides

(an actual picture; only an estimate) of the budgeted cost.

Answer & Explanation Solved by verified expert

See Answer