Chapter 10, Problem 10.43AP

Prepare a budget with different volumes for planning (Learning Objective 5)

Outrageous 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.

OUTRAGEOUS 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

Outrageous 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. 1. Prepare flexible budget income statements for the company, showing output levels of 55,000, 60,000, and 65,000 kits.
2. 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. 3. Why might Outrageous 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?