Young Corporation has a high probability of operating at 40,000 activity hours during the upcoming period, and lower probabilities of operating at 30,000 hours and 50,000 hours. The company's flexible budget revealed the following: $$\begin{array} { l c c c }
& \underline { 30,000 \text { Hours } } & \underline { 40,000 \text { Hours } } & \underline { 50,000 \text { Hours } } \
\text { Variable costs } & \$ 135,000 & \$ 180,000 & \$ 225,000 \
\text { Fixed costs } & 720,000 & 720,000 & 720,000
\end{array}$$ Young's flexible-budget formula, where Y is defined as total cost and AH represents activity hours, is:
A) Y = $4.50AH + $24AH.
B) Y = $4.50AH + $720,000.
C) Y = $22.50AH.
D) Y = $180,000 + $18AH.
E) Y = $945,000.

Question

Young Corporation has a high probability of operating at 40,000 activity hours during the upcoming period, and lower probabilities of operating at 30,000 hours and 50,000 hours. The company's flexible budget revealed the following: $$\begin{array} { l c c c } 
& \underline { 30,000 \text { Hours } } & \underline { 40,000 \text { Hours } } & \underline { 50,000 \text { Hours } } \
\text { Variable costs } & \$ 135,000 & \$ 180,000 & \$ 225,000 \
\text { Fixed costs } & 720,000 & 720,000 & 720,000
\end{array}$$ Young's flexible-budget formula, where Y is defined as total cost and AH represents activity hours, is:
A) Y = $4.50AH + $24AH.
B) Y = $4.50AH + $720,000.
C) Y = $22.50AH.
D) Y = $180,000 + $18AH.
E) Y = $945,000.

Quizplus · Accepted Answer

The fixed cost is $720,000 at all activity levels. The variable cost per hour is ($225,000 - $180,000) / (50,000 - 40,000) = $4.50. Thus, the flexible-budget formula is Y = $4.50AH + $720,000.

Young Corporation Has a High Probability of Operating at 40,000