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

Using the provided formulas, the net operating income in the planning budget for January would be:

Budgeted sales revenue = 7,000 units × $30 per unit = $210,000
Budgeted variable expenses = 7,000 units × $14 per unit = $98,000
Budgeted fixed expenses = $100,800
Net operating income = Budgeted sales revenue - Budgeted variable expenses - Budgeted fixed expenses
Net operating income = $210,000 - $98,000 - $100,800 = $11,200

To find the net operating income for the actual level of activity, we need to use the flexible budget formula:

Flexible budget = Budgeted amount + (Actual level of activity - Budgeted level of activity) × Variable cost per unit
Flexible budget = $210,000 + (6,970 - 7,000) × $14 = $208,820

Actual net operating income = Actual sales revenue - Actual variable expenses - Budgeted fixed expenses
Actual net operating income = $207,340 - ($97,580 + $220) - $100,800 = $8,740

Therefore, the closest net operating income in the planning budget for January is $20,700 (Option C).

Letts Corporation Manufactures and Sells a Single Product