Kevin Company prepared the following static budget for the year 2015: If a flexible budget was prepared at a volume of 7,000, calculate the amount of operating income.
A)$3,500
B)$10,500
C)$6,500
D)$4,000

Question

Kevin Company prepared the following static budget for the year 2015:  If a flexible budget was prepared at a volume of 7,000, calculate the amount of operating income.
A)$3,500 
B)$10,500 
C)$6,500 
D)$4,000

Quizplus · Accepted Answer

To prepare a flexible budget, we need to calculate the variable costs at the given volume level (in this case, 7,000 units) and add them to the fixed costs from the static budget.

Variable cost per unit = $8 + $6 + $2 = $16 
Total variable costs at 7,000 units = $16 x 7,000 = $112,000 
Total fixed costs = $58,000

Total operating expenses at 7,000 units = $112,000 + $58,000 = $170,000 
Total sales revenue at 7,000 units = $140 x 7,000 = $980,000

Operating income at 7,000 units = $980,000 - $170,000 = $810,000 - $58,000 = $752,000

Therefore, the correct answer is C) $6,500.

Kevin Company Prepared the Following Static Budget for the Year