Data: “I’ll never understand this accounting stuff,” Ricardo Mulliade yelled, wa
ID: 2423588 • Letter: D
Question
Data:
“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 XX 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.”
Question:
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). (10 pts.) ____
Explanation / Answer
Answer: Yes Ricardo should respond with an increase in price, as it yields higher income of $7180. If he does not increase the price, he will end up with an income of $6550, even with a higher sale. The workings are given below: Income Projection for 1200 units after increase before increase in cost but with in cost no price increase Profit for 1000 units 6850 Add.Contribution for 200 units (200*10.5) 2100 Income 8950 8950 less: increase in cogs-$2 per unit 2400 Income 6550 Income projection for 1140 (1200 - 5%) units with price increase: profit for 1000 units before increase in cost/price 6850 increase in cost for 1000 units (2*1000) -2000 increase in price for 1000 units (1*1000) 1000 increase in contribution for 140 units @ 10.5-2+1 1330 income 7180 Workings for finding out contribution per unit: last this month month quantity sold 1000 1500 profit 6850 12100 pofit per unit 6.85 8.07 contribution per unit = (12100-6850)/(1500-1000) 10.5
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