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Comprehensive Cost-Volume-Profit (CVP) Analysis and Decision-Making for Blake Dunn's Mascot Business

A comprehensive CVP analysis and decision-making guide for Blake Dunn's Mascot Business.

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    Comprehensive Cost - Volume - Profit (CVP) Analysis and Decision - Making for Blake Dunn's Mascot Business 3 ‐ 34 Comprehensive CVP analysis (LO 1 , 2 , 3 , 5 ) “I'll never understand this accounting stuff,” Blake Dunn yelled, waving the income statement he had just received from his accountant in the morning mail. “Last month, we sold 1,000 stuffed State University mascots 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 I ever make plans if I can't predict my income? I'm going to give Janice one last chance to explain this to me,” he declared as he picked up the phone to call Janice Miller, his acco untant. “Will you try to explain this operating income thing to me one more time?” Blake asked Janice. “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.” Taking a deep breath, Janice replied, “Sure, Blake. I'd be happy to explain how you made so much more operating income than you were expecting.” Required a. Assume Janice's role. Explain to Blake why his use of operating income per mascot was in error. a. Blake’s error stems from misunderstanding how operating income behaves when the number of units sold changes. Operating income is affected by both variable costs and fixed costs , and it does not increase linearly with sales because fixed costs do not change with the number of units sold. • The operating income per mascot assumes that the entire increase in income is from variable costs and revenue alone. However, fixed costs (e.g., rent, wages, utilities) remain the same regardless of the number of units sold. • As a result, while variable costs and revenue are affected by the number of units sold, Blake’s operating income per mascot is not consistent, because some of the increase in operating income comes from the spreading of fixed costs over more units. This explains why the income per mascot increased from $6.85 to $8.07 despite no change in the price per mascot. b. Using the following income statements, prepare a contribution margin income statement for March. 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 Advertising expense 750 875

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