Question

You own a​ 500-unit apartment complex and charge a monthly rental rate of​ $1,200 per unit. When the apartments are​ 96% occupied, monthly operating costs total​ $300,000, $240,000 of which are variable costs. A nearby manufacturing plant has just announced that it is closing in the upcoming year. As a​ result, you anticipate occupancy will decrease to​ 85%. Using your knowledge of cost​ behavior, what is your predicted monthly operating​ income?

A.

​$225,600

B.

​$246,000

C.

​$216,875

D.

​$237,500                                         

E.

None of the above.

Answer 1

At 96% occupancy, total monthly operating costs = $300,000

Variable costs at 96% occupancy = $240,000

Fixed costs = Total operating costs - Variable costs

= 300,000-240,000

= $60,000

Total units = 500

At 96% occupancy, units occupied = 500 x 96%

= 480

Variable cost per unit = Total variable cost / Number of units

= 240,000/480

= $500

Number of units occupied at 85% occupancy = 500 x 85%

= 425

Income Statement (at 85% occupancy)
Revenue (425 x 1,200)	510,000
Costs:
Variable costs(425 x 500)	-212,500
Fixed costs	-60,000
Operating income	$237,500

Correct option is D.

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