Question

Flowing Bubbles, Inc., produces multicolored bubble solution used for weddings and other events. Data: The company's master budget income statement for August follows. It is based on expected sales volume of 55,000 bubble kits. Flowing Bubbles, Inc. Income Statement Month ended August 31 Sales revenue………………………………… $159,500 Variable expenses: COGS………………...68,750 Sales commissions…...11,000 Utilities expense……...8,250 Fixed expenses: Salary expense……….30,000 Depreciation expense…20,000 Rent expense………….11,000 Utilities expense………6,000 Total expenses………………………………...155,000 Operating income……………………………...45,00 Requirements 1. Prepare flexible budget income statements for the company, showing output levels of 55,000, 60,000, and 65,000 kits. 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. Why might Flowing Bubbles’ manager want to see the graph you prepared in Requirement 2 as well as the columnar analysis in Requirement 1? What is the disadvantage of the graph approach?

Answer 1

Flexible budget
Bubble kits	55000	60000	65000
Sales revenue	159500	174000	188500
Variable expense
COGS	68750	75000	81250
Sales commission	11000	12000	13000
utilities expense	8250	9000	9750
Total variable expense	88000	96000	104000
Contribution margin	71500	78000	84500
Fixed expense
Salary expense	30000	30000	30000
Depreciation expense	20000	20000	20000
rent expense	11000	11000	11000
utilities expense	6000	6000	6000
Total fixed expense	67000	67000	67000
Net operating income	4500	11000	17500