Data:”I’ll never understand this accounting stuff,” Ricardo Mulliade yelled, waving the incomestatement 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’dmake $10,275. But his income statement shows an operating income of $12,100! Howcan I ever make plans if I can’t predict my income? I’m going to give Binta one lastchance to explain this to me,” he declared as he picked up the phone to call BintaJallow, his accountant.”Will you try to explain this operating income thing to me one more time?” Ricardoasked Binta. “After I saw last month’s income statement, I thought each mascot wesold generated $6.85 in net income; now this month, each one generates $8.07! Therewas no change in the price we paid for each mascot, so I don’t understand how thishappened. If I had known I was going to have $12,100 in operating income, I wouldhave looked more seriously at adding to our product line.”

REQUIRED:

a. Assume Binta’s role. Explain to Ricardo why his use of operating income per mascot was in error. (5 pts.)

b. Prepare a income statement that will help me calculate how much each mascot contributes to Income.

c. I plans to sell 500 stuffed mascots next month. How much operating income can I expect?

d. I am afraid the income is going to be too low. I want to earn a profit of $3,700. How many mascots would I need to sell to make that profit? I also want to know how many I need to sell to breakeven.

e.    I am considering two options to increase the number of mascots sold next month. Which option should I implement?

a.     I believe I can increase sales by advertising in the university newspaper. I can purchase a package of 12 ads over the next month for $1,200. I believe these ads will increase my mascot sales from 500 to 960.   Note: (the $1,200 is an addition to the fixed advertising expense he already has.)

b.    The second option is to reduce the selling price. If I decrease the selling price by 10%, I think I can sell 1,000 mascots.

f. I just received notice from my supplier that my Cost of goods has increased by 20%. I think I am going to increase price to cover 15% of the increase so that cost of goods only increases 5%. Should I increase the price? Note: