Outdoor Outfitters has created a flexible budget for the 70,000-unit and the 80,

Question

Outdoor Outfitters has created a flexible budget for the 70,000-unit and the 80,000-unit levels of activity shown as follows. Complete Outdoor Outfitters's flexible budget at the 106,000-unit level of activity. Assume that the cost of goods sold and variable operating expenses vary directly with sales and that income taxes remain at 30 percent of operating income.

70,000 Units 80,000 Units 106,000 Units Sales $1,400,000 $1,600,000 Cost of goods sold 840,000 960,000 Gross profit on sales $560,000 $640,000 $0 Operating expenses ($90,000 fixed) 370,000 410,000 Operating income $190,000 $230,000 $0 Income taxes (30% of operating income) 57,000 69,000 Net income $133,000 $161,000 $0

Explanation / Answer

1. Sales at 70000 units = 1400000 so the selling price is 1400000/70000=$20

So the sales at 106000 units = 106000x20 =$2120000

2. Since cost of goods sold is directly proportional to sales we can calculate cost of goods sold as follows:

2120000 x 960000 / 1600000 = $1272000

3. Gross profit = 2120000 - 1272000 = $848000

4. Since in operating expenses $90000 is fixed expenses it stays the same even when 106000 units are produced. When 70000 units are produced variable operating expenses are 370000 - 90000 = 280000. Variable operating expense per unit = 280000/70000 = $4.

When 106000 units are produced variable expenses are 106000 x 4 = $424000. Fixed operating expenses are $90000. So total operating expenses = 424000+90000 = $514000.

5. Operating Income = 848000 - 514000 = $334000

6. Taxes = 334000 x 30% = $100200

7. Net Income = 334000 - 100200 = $233800

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