Question

Summer Nights sells bottles of bug spray for $8.00 each. Variable costs are $2.00 per bottle, while fixed costs are $40,000 per month for volumes up to 40,000 bottles of spray and $58,000 per month for volumes above 40,000 bottles of spray. The flexible budget would reflect monthly operating income for 10,000 bottles of spray and 22,000 bottles of spray of what dollar amounts?
A. $80,000 and $176,000, respectively
B. $20,000 and $92,000, respectively
C. $40,000 and $92,000, respectively
D. $2000 and $118,000, respectively

Answer 1

Answer:

B. $20,000 and $92,000, respectively

Explanation:

Since both 10,000 bottles and 22,000 bottles of spray are under 40,000. A value of $40,000 per month should be considered for fixed costs in both situations.

For 10,000 botles, monthly operating income is:

$I = 10,000*(8.00-2.00) - 40,000\\I= \ 20,000$

For 22,000 botles, monthly operating income is:

$I = 22,000*(8.00-2.00) - 40,000\\I= \ 92,000$

Therefore, the correct answer is alternative B.