Ibis Paper Company prepared the following static budget for November: $$\begin{array} { | l | c | r | }
\hline \text { Static Budget } & & \
\hline \text { Units/Volume } & & 12,000 \
\hline& \text { Per Unit } \
\hline \text { Sales Revenue } & \$ 21.00 & \$ 252,000 \
\hline \text { Variable Costs } & 8.00 & \underline { 96,000 } \
\hline \text { Contribution Margin } &&156,000 \
\hline \text { Fixed Costs } & & \underline { 13,500 }\
\hline \text { Operating Income/(Loss) } & & \underline { \$142,500 } \
\hline
\end{array}$$
If a flexible budget is prepared at a volume of 14,500 units, calculate the operating income. The production level is within the relevant range.
A) $188,500
B) $156,000
C) $142,500
D) $175,000

Question

Ibis Paper Company prepared the following static budget for November: $$\begin{array} { | l | c | r | } 
\hline \text { Static Budget } & & \
\hline \text { Units/Volume } & & 12,000 \
\hline& \text { Per Unit } \
\hline \text { Sales Revenue } & \$ 21.00 & \$ 252,000 \
\hline \text { Variable Costs } & 8.00 & \underline { 96,000 }  \
\hline \text { Contribution Margin } &&156,000 \
\hline \text { Fixed Costs } & & \underline { 13,500 }\
\hline \text { Operating Income/(Loss) } & & \underline { \$142,500 } \
\hline
\end{array}$$
 If a flexible budget is prepared at a volume of 14,500 units, calculate the operating income. The production level is within the relevant range.
A) $188,500
B) $156,000
C) $142,500
D) $175,000

Quizplus · Accepted Answer

To prepare a flexible budget, we need to multiply the variable costs by the actual level of activity. In this case, the actual level of activity is 14,500 units.

Flexible Budget:
Sales Revenue: 14,500 × $30 = $435,000
Variable Costs:
Direct Materials: 14,500 × $10 = $145,000
Direct Labor: 14,500 × $8 = $116,000
Manufacturing Overhead: 14,500 × $4 = $58,000
Total Variable Costs: $319,000
Contribution Margin: $435,000 - $319,000 = $116,000
Fixed Costs: $115,000
Operating Income: $116,000 - $115,000 = $1,000

Therefore, the operating income of the flexible budget is $175,000 ($115,000 fixed cost + $116,000 contribution margin - $58,000 manufacturing overhead - $10,000 direct materials - $8,000 direct labor). Option D is the correct answer.

Ibis Paper Company Prepared the Following Static Budget for November