Comprehensive Analysis of Cost Behavior and Profitability in Film Production: A Case Study of "Forrest Gump

Preview (2 of 6 Pages)

100%

Purchase to unlock

Loading page image...

Comprehensive Analysis of Cost Behavior and Profitability in FilmProduction: A Case Study of "Forrest Gump3‐34ComprehensiveCVPanalysis(LO1,2,3,5) “I'll never understand this accounting stuff,” Blake Dunnyelled, waving the income statement he had just received from his accountant in the morning mail. “Lastmonth, we sold 1,000 stuffed State University mascots and earned $6,850 in operating income. Thismonth, when we sold 1,500, I thought we'd make $10,275. But this income statement shows anoperating income of $12,100! How can I ever make plans if I can't predict my income? I'm going to giveJanice one last chance to explain this to me,” he declared as he picked up the phone to call Janice Miller,his accountant.“Will you try to explain this operating income thing to me one more time?” Blake asked Janice. “After Isaw last month's income statement, I thought each mascot we sold generated $6.85 in net income; nowthis month, each one generates $8.07! There was no change in the price we paid for each mascot, so Idon't understand how this happened. If I had known I was going to have $12,100 in operating income, Iwould 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 moreoperating income than you were expecting.”Requireda.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 ofunits sold changes. Operating income is affected by bothvariable costsandfixed costs, and it doesnot increase linearly with sales because fixed costs do not change with the number of units sold.•Theoperating income per mascotassumes that the entire increase in income is fromvariable costs and revenue alone. However, fixed costs (e.g., rent, wages, utilities) remainthe 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 inoperating income comes from the spreading of fixed costs over more units. This explainswhy the income per mascot increased from $6.85 to $8.07 despite no change in the price permascot.b.Using the following income statements, prepare a contribution margin income statement for March.FebruaryMarchSales revenue$25,000$37,500Cost of goods sold10,00015,000Gross profit15,00022,500Rent expense1,5001,500Wages expense3,5005,000Shipping expense1,2501,875Utilities expense750750Advertising expense750875

Loading page image...

Preview Mode

This document has 6 pages. Sign in to access the full document!

Report

Study Now!

Document Details

Related Documents

Accounting

Master Managerial Accounting Techniques

Controlling and Reporting of Real Assets

Sarbanes Oxley Act, GAAP and IFRS

Accounting Audit Final Exam MCQs 2015

Team A Week 5 Problems

IFRS or US GAAP Which is the Best Reporting Standard

Understanding Key Concepts in Managerial Accounting

Financial Reporting, Regulations, and Corporate Governance

Midterm Exam on Governmental and Not-for-Profit Accounting

Company

Explore

Study Tools