Question

1.Variable costs as a percentage of sales for Lemon Inc. are 78%, current sales are $524,000,...

1.Variable costs as a percentage of sales for Lemon Inc. are 78%, current sales are $524,000, and fixed costs are $192,000. How much will operating income change if sales increase by $38,300?

a.$8,426 decrease

b.$8,426 increase

c.$29,874 increase

d.$29,874 decrease

2.Strait Co. manufactures office furniture. During the most productive month of the year, 3,700 desks were manufactured at a total cost of $84,000. In the month of lowest production, the company made 1,300 desks at a cost of $64,500. Using the high-low method of cost estimation, total fixed costs are

a.$19,500

b.$53,919

c.$84,000

d.$64,500

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Homework Answers

Answer #1

1.

Contribution margin ratio = 1 - Variable cost ratio = 1 - 78% 22%
Increase in operating income = Increase in sales * Contribution margin ratio = 38300 * 22% 8426 Increase Option b

2.

Total cost Desk manufactured
High level of activity 84000 3700
(-) Low level of activity 64500 1300
Difference 19500 2400
Variable cost per desk = Difference in total cost / Difference in desk manufactured = 19500 / 2400 8.13
Now let us calculate the total fixed cost from the data of high level of activity
Total cost = ( Desk manufactured * Variable cost per desk ) + Total fixed cost
84000 = ( 3700 * 8.13 ) + Total fixed cost
84000 = 30081 + Total fixed cost
Total fixed cost = 84000 - 30081 53919 Option b
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