I just need help figuring out 5 through 8
ACC 299 Winter 2020 Prof. Graybeat Sis a small company that currently operates in Knoxville, TN and has a single product – stadium seat cushions bearing the University of Tennessee logo. Eventually Gary wants to expand and sell this product for other university and professional sports teams, and to add other merchandise. In the meantime, Gary is having a little difficulty understanding margins, and operating income and product mix. “I'll never understar I never understand this accounting stuff.” Gary velled, waving the income statement he had the morning mail. “last month we sold 1,000 stadium seat cushions and earned $6,850 in operating income. This month, when we sold 1,500, I thought we'd make $10,275. But this income statement shows an operating income of $12,100! How can Tever make plans if I can't predict my income? I'm going to give Cathy one last chance to explain this to me,” he declared as he picked up the phone to call Cathy, his accountant **Will you try to explain this operating income thing to me one more time please Gary asked Cathy. “After I saw last month's income statement, I though each cushion 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 cushion, and we didn't change our selling price, 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.” Taking a deep breath, Cathy replied, “Sure, Gary. I'd be happy to explain how you made so much more operating income than you were expecting.” Required: 1. Assume the role of Cathy. Explain to Gary why his use of operating income per cushion was in error. 2. Using the following income statements, prepare a contribution margin income statement for October. Sales Cost of Goods Sold Gross Profit Rent Expense Wages Expenses Shipping expense Utilities expense Advertising expense Insurance expense Operating income September $25,000 10,000 15,000 1,500 3.500 1.250 750 750 400 $6.850 October $37,500 15,000 22,500 1,500 5,000 1,875 750 875 400 $12.100 Wages and advertising are mixed costs. The fixed portion of each of those costs is $500. 3. What is Gary's break-even sales in units and dollars? 4. Gary plans to sell 500 seat cushions next month. How much operating income can Gary expect to earn next month if he actually realizes his target sales? v el 2020 PIUI. UU. 5. Gary wasn't happy with the projected income s happy with the projected income statement you showed him for a sales level of 500 cushions. He wants to know how many seat cushions he wi $3,700 in operating income. w how many seat cushions he will need to sell to earn 6. Gary is evaluating two options to increase the aluating two options to increase the number of cushions sold next month. First, The believes he can increase sales by advertising in the university newspaper. Fondse a package of 12 ads over the next month for a total of $1,200. He believes the ads will increase the number of stadium seat cushions sold from 500 to 960. A second option would be to reduce the selling price. Gary believes a 10% decrease in the price will result in 1,000 cushions sold. Which plan should Gary implement? At what level of sales would he be indifferent between the two plans? 1. Just after Gary completed an income projection for 1,200 stadium seat cushions, his supplier called to inform him of a 20% increase in the cost of the cushions that Gary purchases, effectively immediately. Gary knows that he cannot pass the entire increase on to his customers but thinks he can pass on half of it while only experiencing a 5% decrease in units sold. Should Gary respond to the increase in cost of goods sold with an increase in price? 8. Refer back to the original information. Gary has decided to add stadium blankets to his product line. He has found a supplier who will provide the blankets for $32, and he plans to sell them for $55. All other variable costs currently incurred for selling the stadium seat cushions will also be incurred for selling blankets. Additional fixed costs of $350 per month will be incurred if the blankets are taken on as a product line. Gary believes he can sell one blanket for every three stadium seat cushions. How many blankets and seat cushions will Gary need to sell each month in order to break even?