Kevin Company prepared the following static budget for the year 2015: $$\begin{array} { | l | c | r | }
\hline \text { Static Budget } & & \
\hline \text { Units/volume } & & 5,000 \
\hline & \text { Per Unit } & \
\hline \text { Sales revenue } & \$ 3.00 & \$ 15,000 \
\hline \text { Variable expenses } & \$ 1.50 & 7,500 \
\hline \text { Contribution margin } & & 7,500 \
\hline \text { Fixed expenses } & & 4,000 \
\hline \text { Operating income/(loss) } & & \$ 3,500 \
\hline
\end{array}$$ 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: $$\begin{array} { | l | c | r | } 
\hline \text { Static Budget } & & \
\hline \text { Units/volume } & & 5,000 \
\hline & \text { Per Unit } & \
\hline \text { Sales revenue } & \$ 3.00 & \$ 15,000 \
\hline \text { Variable expenses } & \$ 1.50 & 7,500 \
\hline \text { Contribution margin } & & 7,500 \
\hline \text { Fixed expenses } & & 4,000 \
\hline \text { Operating income/(loss) } & & \$ 3,500 \
\hline
\end{array}$$ 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 the flexible budget, we need to adjust the budgeted amounts for the variable expenses and sales revenue for the actual volume of activity.

Variable expenses per unit = $1.50

Sales revenue per unit = $3.00

Flexible budget for 7,000 units:

Sales revenue = 7,000 units x $3.00 per unit = $21,000

Variable expenses = 7,000 units x $1.50 per unit = $10,500

Contribution margin = $21,000 - $10,500 = $10,500

Fixed expenses = $4,000 (given in the static budget)

Operating income = $10,500 - $4,000 = $6,500

Therefore, the correct answer is C.

Kevin Company Prepared the Following Static Budget for the Year