Cheertime Company produces three lines of greeting cards scented, musical, and regular. There are common fixed expenses of $7,500 (meaning this expense is applied only 1 time no matter if the company produces one line or all three lines). The additional financial information for all three lines is below: Scented: Sales $ 10,000 Variable expenses $ 7,000 Advertising $ 4,000 Musical: Sales $ 15,000 Variable expenses $ 12,000 Advertising $ 5,000 Regular: Sales $ 25,000 Variable expenses $ 12,500 Advertising $ 3,000 With the current financial information, Cheertime's current operating income is a loss of $1,000. For 2022, the president of Cheertime is considering two alternatives to cut down on losses: 1) completely eliminating the scented and musical card lines which she projects will decrease the sales and variable expenses of the regular greeting card line by 20%. Or 2) Increasing advertising by $250 for the scented line and $750 for the musical line which she projects will increase the sales and variable expenses of BOTH of these lines by 30%. 2. Complete the income statement below for the second alternative. Header Needed Header Needed Header Needed Scented Musical Regular Total Sales Variable expenses Contribution margin Advertising Segment margin Common fixed expenses Operating Income 3. Would you recommend that the company keep operations as-is, employ alternative 1, or employ alternative 2? 4. Any decision comes with risk. Identify and explain at least one risk that the company could incur from making your decision in #3.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Cheertime Company produces three lines of greeting cards scented, musical, and regular. There are common fixed
expenses of $7,500 (meaning this expense is applied only 1 time no matter if the company produces one line or all
three lines). The additional financial information for all three lines is below:
Scented:
Sales $ 10,000
Variable expenses $ 7,000
Advertising $ 4,000
Musical:
Sales $ 15,000
Variable expenses $ 12,000
Advertising $ 5,000
Regular:
Sales $ 25,000
Variable expenses $ 12,500
Advertising $ 3,000
With the current financial information, Cheertime's current operating income is a loss of $1,000. For 2022, the
president of Cheertime is considering two alternatives to cut down on losses: 1) completely eliminating the
scented and musical card lines which she projects will decrease the sales and variable expenses of the regular
greeting card line by 20%. Or 2) Increasing advertising by $250 for the scented line and $750 for the musical line
which she projects will increase the sales and variable expenses of BOTH of these lines by 30%.

2. Complete the income statement below for the second alternative.
Header Needed
Header Needed
Header Needed
Scented Musical Regular Total
Sales
Variable expenses
Contribution margin
Advertising
Segment margin
Common fixed expenses
Operating Income
3. Would you recommend that the company keep operations as-is, employ alternative 1, or employ alternative 2?

4. Any decision comes with risk. Identify and explain at least one risk that the company could incur from making
your decision in #3.

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