Use the following to answer questions 15-17: Monroe Promotions, Inc. sells T-shi
ID: 2379725 • Letter: U
Question
Use the following to answer questions 15-17:
Monroe Promotions, Inc. sells T-shirts decorated for a variety of concert performers. The company has developed the following budget for the coming year based on a sales forecast of 80,000 T-shirts:
Sales.............................................................................
$1,200,000
Cost of Goods Sold........................................................
720,000
Gross Profit...................................................................
480,000
Operating Expenses ($100,000 is fixed)...........................
316,000
Operating Income..........................................................
164,000
Income Taxes (30% of operating income).......................
49,200
Net Income...................................................................
$ 114,800
Cost of goods sold and variable operating expenses vary directly with sales, and the income tax rate is 30% at all levels of operating income.
If the concert season is slow due to poor weather, Monroe/>/> estimates that sales could fall to as low as 60,000 T-shirts.
15. Refer to the information above. In a flexible budget for sales of 60,000 T-shirts, how much would Monroe/>/> budget for operating expenses
Answer
16. Refer to the information above. What unit cost did Monroe/>/> use in budgeting the cost of goods sold for the year?
Answer
17. Refer to the information above. Assume Monroe/>/> actually achieves the 60,000 unit sales level, and that net income actually earned at this level was $70,000. A performance report would indicate that net income was:
Answer
Sales.............................................................................
$1,200,000
Cost of Goods Sold........................................................
720,000
Gross Profit...................................................................
480,000
Operating Expenses ($100,000 is fixed)...........................
316,000
Operating Income..........................................................
164,000
Income Taxes (30% of operating income).......................
49,200
Net Income...................................................................
$ 114,800
Explanation / Answer
15. Current variable operating expenses = total operating expenses - fixed operating expenses = 316,000-100,000 = 216,000
New sales = current sales * new T-shirt volumes / current T-shirt volumes = 1,200,000*60,000/80,000 = 900,000
New variable operating expenses = current variable operating expenses * new sales/current sales = 216,000*900,000/1,200,000 = 162,000
So new total operating expenses = new variable operating expenses + fixed operating expenses = 162,000+100,000 = 262,000. So the answer is choice B
16. Unit cost of goods sold = total cost of goods sold/no of T-shirts sold = 720,000/80,000 = $ 9. So the answer is choice B
17. New sales = 900,000
New cost of goods sold = 60,000 T-shirts*$9/shirt = 540,000
New operating expenses = 262,000
New operating income = 900,000-540,000-262,000 = 98,000
Net income = operating income * (1-tax rate) = 98,000*(1-30%) = 68,600
But as actual net income was 70,000, the over-performance = 70,000-68,600 = 1,400. So the answer is choice A
Hope this helped ! Let me know in case of any queries.
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