# CASE/PROBLEM “I’ll never understand this accounting stuff,” Ricardo Mulliade yelled, waving the income statement

September 8, 2016

Question
CASE/PROBLEM

“I’ll never understand this accounting stuff,” Ricardo Mulliade yelled, waving the income statement he had just received from his accountant in the morning mail. “Last month (February), we sold 1,000 stuffed Edmonds Community College mascots and earned \$6,850 in operating income. This month (March), when we sold 1,500, I thought we’d make \$10,275. But his income statement shows an operating income of \$12,100! How can I ever make plans if I can’t predict my income? I’m going to give Binta one last chance to explain this to me,” he declared as he picked up the phone to call Binta Jallow, his accountant.

“Will you try to explain this operating income thing to me one more time?” Ricardo asked Binta. “After I saw last month’s income statement, I thought each mascot we sold generated \$6.85 in net income; now this month, each one generates \$8.07! There was no change in the price we paid for each mascot, so I don’t understand how this happened. If I had known I was going to have \$12,100 in operating income, I would have looked more seriously at adding to our product line.”

1. Using the following income statements, prepare a contribution margin income statement for March. (Hint, use the high-low method to separate the variable and fixed elements of each mixed cost.)

February

March

Sales Revenue

\$25,000

\$37,500

Cost of Goods Sold

10,000

15,000

Gross Profit

15,000

22,500

Rent Expense

1,500

1,500

Wages Expense

3,500

5,000

Shipping Expense

1,250

1,875

Utilities Expense

750

750

750

875

Insurance Expense

400

400

Operating Income

\$ 6,850

\$12,100

2. Ricardo is evaluating two options to increase the number of mascots sold next month. First, he believes he can increase sales by advertising in the university newspaper. Ricardo can purchase a package of 12 ads over the next month for a total of \$1,200. He believes the ads will increase the number of stuffed mascots sold from 500 to 960. A second option would be to reduce the selling price. Ricardo believes a 10% decrease in the price will result in 1,000 mascots sold. Which plan should Ricardo implement (show calculations)? At what level of sales would he be indifferent between the two plans? (Hint: At what sales level would the income from both plans be the same). (10 pts.) _____

3. Just after Ricardo completed an income projection for 1,200 stuffed mascots, his supplier called to inform him of a 20% increase in cost of goods sold (an increase from \$10.00 per unit to \$12.00 per unit), effective immediately. Ricardo knows that he cannot pass the entire increase on to his customers, but thinks he can pass on half of it while suffering only a 5% decrease in units sold. Should Ricardo respond to the increase in cost of goods sold with an increase in price? (Hint: Prepare two income statements; one with no increase in sales price and the other with the increase).

*I asked this question twice to two different tutors, and I got different answers from them. I want to make sure which one is correct one!!*

This one is what I got from the college tutor, and here’s only part 1, and she said there must be more information to solve part 2.

Part 1: First Income Statement w/ NO increase in sales price…
Edmonds College Mascots

Income Statement

For the Month of ________:

Sales (1,200 units x \$25)

\$30,000

Cost of Goods Sold (1,200 units x \$12)

\$14,400

Less: Variable Expenses

Shipping Expense

\$1,875

Wages Expense

\$4,500

\$375

Contribution Margin

\$8,850

Less: Fixed Expenses

Rent Expense

\$1,500

Utilities Expense

\$750

Insurance Expense

\$400

Wages Expense

\$500

\$500

Net Income

\$5,200

I attached what I got from another coursehero tutor!! However, even though this is correct one, I do not know why he used 1200 units and 1140 units. Please be specific and show all calculations!

February
March
Sales Revenue
\$25,000
\$37,500
Cost of Goods Sold
10,000
15,000
Gross Profit
15,000
22,500
Rent Expense
1,500
1,500
Wages Expense
3,500
5,000
Shipping Expense
1,250
1,875
Utilities Expense
750
750
750
875
Insurance Expense
400
400
Operating Income
\$6,850
\$12,100
Just after Ricardo completed an income projection for 1,200 stuffed mascots, his supplier called to inform him of a 20% increase in cost of g
(an increase from \$10.00 per unit to \$12.00 per unit), effective immediately. Ricardo knows that he cannot pass the entire increase on to his
but thinks he can pass on half of it while suffering only a 5% decrease in units sold. Should Ricardo respond to the increase in cost of good
increase in price? (Hint: Prepare two income statements; one with no increase in sales price and the other with the increase).

Sales Revenue
Cost of Goods Sold
Gross Profit
Rent Expense
Wages Expense
Shipping Expense
Utilities Expense
Insurance Expense
Operating Income

1200 units
30,000
(14,400)
15,600
1,500
4,100
1,500
750
800
400
6,550

1140 units
31,200
(14,400)
16,800
###
3,920
1,425
###
785
###
8,020

Yes, Ricardo must respond to the increase in cost of goods sold with an increase in price
as it increases the operating income.
Calculation of variable and fixed expenses
Wages expense
1500
500
Variable
Feb
Variable
Fixed
Shipping expense

625
500

Variable
Feb
Variable
Utilities expense

3 Per unit
March
3000
4500
500
500

1.25 Per unit
March
1250
1875

Feb

March
750

750

125
500

Variable

0.25 Per unit
March
250
375
500
500

Feb
Variable
Fixed

t of goods sold
his customers,
goods sold with an

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