Letts Corporation manufactures and sells a single product.The company uses units as the measure of activity in its budgets and performance reports.During January, the company budgeted for 7, 000 units, but its actual level of activity was 6, 970 units.The company has provided the following data concerning the formulas to be used in its budgeting: The net operating income in the planning budget for January would be closest to:
A)$20, 292
B)$12, 988
C)$20, 700
D)$12, 877

Question

Letts Corporation manufactures and sells a single product.The company uses units as the measure of activity in its budgets and performance reports.During January, the company budgeted for 7, 000 units, but its actual level of activity was 6, 970 units.The company has provided the following data concerning the formulas to be used in its budgeting:  The net operating income in the planning budget for January would be closest to:
A)$20, 292 
B)$12, 988 
C)$20, 700 
D)$12, 877

Quizplus · Accepted Answer

To calculate the net operating income (NOI) in the planning budget, we need to first calculate the contribution margin per unit and then use that to calculate the total contribution margin and subtract the total fixed expenses.

Contribution margin per unit = Sales price per unit - Variable expenses per unit
= $86 - $61
= $25

Total contribution margin = Contribution margin per unit * Actual units sold
= $25 * 6,970
= $174,250

Net operating income = Total contribution margin - Fixed expenses
= $174,250 - $153,550
= $20,700

Therefore, the closest net operating income in the planning budget for January would be $20,700, which is option C.

Letts Corporation Manufactures and Sells a Single Product