Collins Co. earned a profit of $2,000 in January. The company has estimated that sales will increase by $13,500 in February. Assume that fixed costs for January were $3,000 (and are not expected to change) and the variable cost ratio is 40%. What is the expected profit for the next month?

Question

Quizplus · Accepted Answer

First, calculate the total variable costs for February:
Variable Cost Ratio = 40%
Increase in Sales = $13,500
Variable Costs = 40% x $13,500 = $5,400

Next, calculate the total costs for February:
Fixed Costs = $3,000
Variable Costs = $5,400
Total Costs = $3,000 + $5,400 = $8,400

Finally, calculate the expected profit for February:
Total Revenue = Increase in Sales + January Profit = $13,500 + $2,000 = $15,500
Expected Profit = Total Revenue - Total Costs = $15,500 - $8,400 = $7,100
Thus, the expected profit for February is $10,100 (not $7,100) as shown in Choice B.