Reflector Glass Company prepared the following static budget for the year: If a flexible budget is prepared at a volume of 8400 units,calculate the amount of operating income.The production level is within the relevant range.

Question

Reflector Glass Company prepared the following static budget for the year:  If a flexible budget is prepared at a volume of 8400 units,calculate the amount of operating income.The production level is within the relevant range.

Quizplus · Accepted Answer

To prepare a flexible budget, we need to calculate the variable costs per unit and fixed costs. Using the data from the static budget, we can calculate the variable cost per unit as $8 ($800,000 ÷ 100,000 units) for direct materials, $4.80 ($480,000 ÷ 100,000 units) for direct labor, and $3.20 ($320,000 ÷ 100,000 units) for variable overhead.

The flexible budget at a volume of 8400 units would have variable costs of:
Direct materials: $8 × 8400 = $67,200
Direct labor: $4.80 × 8400 = $40,320
Variable overhead: $3.20 × 8400 = $26,880

Total variable costs: $134,400

We can calculate the fixed costs by subtracting the total variable costs from the total budgeted costs:
Fixed costs = Total budgeted costs – Total variable costs
Fixed costs = $1,600,000 – $134,400
Fixed costs = $1,465,600

Using this information, we can prepare a flexible budget as follows:

Reflector Glass Company
Flexible Budget
For the Year Ended December 31

Units produced and sold 8,400

Sales revenue ($20 x 8,400) $ 168,000
Variable costs:
Direct materials ($8 x 8,400) 67,200
Direct labor ($4.80 x 8,400) 40,320
Variable overhead ($3.20 x 8,400) 26,880
Total variable costs 134,400
Contribution margin 33.600
Fixed costs 1,465,600
Operating income $ (1,432,000)
 
Thus, the amount of operating income for the flexible budget at a volume of 8400 units is $42,200 (contribution margin of $33,600 less fixed costs of $1,465,600). The correct answer is C.

Reflector Glass Company Prepared the Following Static Budget for the Year