Nicolaysen Corporation manufactures and sells a single product. The company uses units as the measure of activity in its budgets and performance reports. During February, the company budgeted for 5,700 units, but its actual level of activity was 5,690 units. The company has provided the following data concerning the formulas used in its budgeting and its actual results for February: Data used in budgeting: Actual results for February: The net operating income in the planning budget for February would be closest to:
A)$21,360
B)$21,222
C)$13,606
D)$13,558

Question

Nicolaysen Corporation manufactures and sells a single product. The company uses units as the measure of activity in its budgets and performance reports. During February, the company budgeted for 5,700 units, but its actual level of activity was 5,690 units. The company has provided the following data concerning the formulas used in its budgeting and its actual results for February: Data used in budgeting:  Actual results for February:  The net operating income in the planning budget for February would be closest to:
A)$21,360 
B)$21,222 
C)$13,606 
D)$13,558

Quizplus · Accepted Answer

The net operating income in the planning budget is calculated as follows:

$39,510 (Sales revenue) - $22,800 (Variable expenses) - $5,400 (Fixed expenses) = $11,310

Therefore, the net operating income in the planning budget for February is $11,310 for 5,700 units.

To calculate the net operating income for 5,690 units (actual level of activity), we need to use the flexible budget formula:

Flexible budget = [(Actual level of activity - Base level of activity) x Variable cost per unit] + Fixed expenses

Flexible budget = [(5,690 - 5,700) x $4] + $5,400 = $5,340 + $5,400 = $10,740

Therefore, the net operating income for 5,690 units is $10,740.

Since the question asks for the net operating income in the planning budget, we need to use the budgeted level of activity (5,700 units). Thus, the closest answer is A) $21,360.

Nicolaysen Corporation Manufactures and Sells a Single Product