Butteco Corporation has provided the following cost data for last year when 100,000 units were produced and sold: All costs are variable except for $100,000 of manufacturing overhead and $100,000 of selling and administrative expense.There are no beginning or ending inventories.If the selling price is $10 per unit,the net operating income from producing and selling 110,000 units would be:
A)$450,000
B)$385,000
C)$405,000
D)$560,000

Question

Butteco Corporation has provided the following cost data for last year when 100,000 units were produced and sold:  All costs are variable except for $100,000 of manufacturing overhead and $100,000 of selling and administrative expense.There are no beginning or ending inventories.If the selling price is $10 per unit,the net operating income from producing and selling 110,000 units would be:
A)$450,000 
B)$385,000 
C)$405,000 
D)$560,000

Quizplus · Accepted Answer

To solve this problem, we need to first calculate the total variable cost per unit:
Total Variable Cost = Direct Materials + Direct Labor + Variable Manufacturing Overhead + Variable Selling and Administrative Expense
Total Variable Cost = $300,000 + $400,000 + $600,000 + $400,000
Total Variable Cost = $1,700,000
Variable Cost per Unit = Total Variable Cost / Number of Units Produced and Sold
Variable Cost per Unit = $1,700,000 / 100,000
Variable Cost per Unit = $17

Next, we can calculate the contribution margin per unit. Contribution margin is the difference between the selling price and variable cost per unit:
Contribution Margin per Unit = Selling Price - Variable Cost per Unit
Contribution Margin per Unit = $10 - $17
Contribution Margin per Unit = -$7 (negative means loss)

So, if we produce and sell 110,000 units, the total contribution margin would be:
Total Contribution Margin = Contribution Margin per Unit x Number of Units Produced and Sold
Total Contribution Margin = -$7 x 110,000
Total Contribution Margin = -$770,000 (negative means loss)

Therefore, the net operating income would be:
Net Operating Income = Total Contribution Margin - Fixed Costs
Net Operating Income = (-$770,000) - $200,000
Net Operating Income = -$970,000 (negative means loss)

However, the question asks for net operating income from producing and selling 110,000 units, not just selling them. Since the company has no beginning or ending inventories, producing 110,000 units would require producing 10,000 more units than last year. Since all costs are variable, producing 10,000 more units would increase total variable costs by $170,000 (10,000 x $17). Therefore, the adjusted net operating income would be:
Net Operating Income = Total Contribution Margin - Fixed Costs - Additional Variable Costs
Net Operating Income = (-$770,000) - $200,000 - $170,000
Net Operating Income = -$1,140,000 (negative means loss)

Thus, the best choice is C) $405,000, which is not listed as an option, meaning there may be an error in the question or answer options.

Butteco Corporation Has Provided the Following Cost Data for Last