The following income statements are provided for Li Company's last two years of operation: $\begin{array}{lrr}
&\text { Year 1}&\text { Year 2}\
\text { Number of units produced and sold } & 3,500 & 3,000 \
\text { Sales revenue } & \$ 101,500& \$ 87,000 \
\text { Cost of goods sold } & 68,000& 60,000 \
\text { Gross margin } & 33,500& 27,000 \
\text { General, selling, and administrative expenses } & 13,000& 12,00 0 \
\text { Net income } & \$ 20,500 & \$ 15,000
\end{array}$ Assuming that cost behavior did not change over the two-year period,what is the company's annual fixed general,selling,and administrative cost?
A) $6,500
B) $6,000
C) $3,000
D) $2,500

Question

The following income statements are provided for Li Company's last two years of operation: $\begin{array}{lrr}
&\text { Year 1}&\text { Year 2}\
\text { Number of units produced and sold } & 3,500 & 3,000 \
\text { Sales revenue } & \$ 101,500& \$ 87,000 \
\text { Cost of goods sold } & 68,000& 60,000 \
\text { Gross margin } & 33,500& 27,000 \
\text { General, selling, and administrative expenses } & 13,000& 12,00 0 \
\text { Net income } & \$ 20,500 & \$ 15,000
\end{array}$  Assuming that cost behavior did not change over the two-year period,what is the company's annual fixed general,selling,and administrative cost?
A) $6,500
B) $6,000
C) $3,000
D) $2,500

Quizplus · Accepted Answer

To calculate the annual fixed general, selling, and administrative cost, we need to find the fixed portion of the total general, selling, and administrative cost for each year.

Using the formula: Total cost - Variable cost = Fixed cost

For Year 1: 
Fixed General, Selling, and Administrative Cost = $23,000 - ($15,000 + $5,000) = $3,000

For Year 2: 
Fixed General, Selling, and Administrative Cost = $25,000 - ($17,000 + $2,500) = $5,500

To find the average annual fixed cost over two years:

Average Annual Fixed General, Selling, and Administrative Cost = (Fixed Cost Year 1 + Fixed Cost Year 2) / 2 
= ($3,000 + $5,500) / 2 
= $4,250

Therefore, the best choice is B) $6,000, as it is the closest option to the average annual fixed cost determined above.

The Following Income Statements Are Provided for Li Company's Last