Reference no: EM132562644

Bubble manufactures insulated plastic bottles for bikes that the company sells for $4.00 per bottle. Last year, the company produced 230,000 bottles and sold 200,000 bottles. This year, Bubble produced 200,000 bottles and sold 230,000 bottles. In both years, Bubble's fixed manufacturing cost was $500,000 and its variable manufacturing cost was $1.00 per bottle. The president of Bubble looked at the financial statements prepared for external reporting and commented,"I don't understand these crazy financial statements. Our prices and costs didn't change, we sell more bottles this year, and we show lower income. Something has got to be wrong

Required:

Question 1: Explain to the president of Bubble in nontechnical terms why the financial statements prepared by the accountant are not in error. In other words, explain to the president why net income fell this year from last year even though Bubble sold more bottles. No calculation is required.