P16.1 (LO 2), AN Keanna's Kreations just completed its best year, generating income of $40,000 from sell- ing decadent wedding cakes and desserts. For a business that is only 2 years old and run from Keanna's own kitchen, this is quite an accomplishment. She has been asked to provide a special-event cake for one event per month at the local convention center, but at a reduced price of $400. While this is mostly fantastic news, Keanna realizes that she is already working at maximum capacity. If she commits to these events, she will either need to find additional capacity or reduce her regular wedding cake sales. The following income statement shows Keanna's results from last year. Sales $210,000 COGS 120,000 $ 90,000 Gross margin Operating expenses Operating income 50,000 $ 40,000 Keanna's average selling price is $1,000 per cake; fixed MOH costs are $67,500 and are included in COGS. All other product costs vary based on volume. Average variable operating expenses are s100 per cake; remaining operating expenses are fixed. After thinking about it further, she realizes she'll avoid the variable operating expenses on the special-event cakes. Required Consider each part independently. a. To keep her existing sales volume and take on the new convention center events, Keanna could need to hire additional employees who would "invade" her home while she and her family sleep. Hiring dependable, night-shift workers will increase her variable product costs per unit by 20%. If she maintains her existing sales and takes on these new events, how much total operating income will she show for next year? b. To maintain her current sales while also capitalizing on the new event opportunity, Keanna could rent alternative kitchen space for these monthly special orders. Fixed operating costs would increase by $5,000 to cover space and equipment leases, as well as an overtime stipend for her shift supervisor. She anticipates the same per-unit variable product costs, though, as last year. How much operating income will her busi- ness generate next year under this scenario? c. Keanna would like to take on the special convention center events, but she is not willing to use her home for more than what she is currently using it and she does not want to rent additional space. This means she will need to cut back on her regular sales by one cake per month for the next year. Given this scenario, what will her operating income be for next year? d. Which option(s) should Keanna seriously consider? Why? Do have any other advice for her?