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Found in: Page 968

Financial & Managerial Accounting

Book edition 7th
Author(s) John J Wild, Ken W. Shaw, Barbara Chiappetta
Pages 1096 pages
ISBN 9781259726705

Question: Brodrick Company expects to produce 20,000 units for the year ending December 31. A flexible budget for 20,000 units of production reflects sales of $400,000; variable costs of$80,000; and fixed costs of $150,000. If the company instead expects to produce and sell 26,000 units for the year, calculate the expected level of income from operations. The expected net operating income from the production and sale of 26,000 units is$266,000.

See the step by step solution

Step 1: Meaning of Operating Income

Operating income refers to the income generated by a business concern from its core operations. It is computed by taking the difference between sales revenue and the associated costs such as variable and fixed.

Step 2: Computation of income from operations

 Particulars Variable cost per unit ($) Total fixed cost ($) At 20,000 units ($) At 26,000 units ($) Selling price ($400,000/20,000 units) 20 400,000 520,000 Variable costs ($80,000/20,000 units) 4 80,000 104,000 Contribution margin 16 320,000 416,000 Fixed cost 150,000 150,000 150,000 Net operating income $170,000$266,000