Question

Baskin Promotions, Inc. sells T-shirts decorated for a variety of concert performers. The company has developed the following budget for the coming year based on a sales forecast of 81,000 T-shirts:

Sales $ 1,418,310
Cost of Goods Sold 831,060
Gross Profit 587,250
Operating Expenses ($100,000 is fixed) 422,380
Operating Income 164,870
Income Taxes (30% of operating income) 49,461
Net Income $ 115,409
Cost of goods sold and variable operating expenses vary directly with sales, and the income tax rate is 30% at all levels of operating income.
If the concert season is slow due to poor weather, Baskin estimates that sales could fall to as low as 61,000 T-shirts.
1. In a flexible budget for sales of 61,000 T-shirts, how much would Baskin budget for operating expenses?
a. $242,780.
b. $342,780.
c. $422,380.
d. $322,380.
2. What unit cost did Baskin use in budgeting the cost of goods sold for the year?
a. $6.02
b. $10.26.
c. $17.51.
d. Some other amount.

Answer 1

Answer: 1. $342,780. 2. $10.26

Step-by-step explanation:

1.

From the question,

Operating expenses =422,380

Fixed expense = 100,000

variable expense = 422,380 - 100,000 = 322,380

Units = 81,000

Per unit variable expense will be variable expense divided by the units:

= 322,380 ÷ 81,000 = 3.98

For 61000 units

variable expense = 61,000 × 3.98

= 242,780

Fixed expense = 100,000

Operating expenses= 242,780 + 100,000 = $342,780

2. The unit cost Baskin used in budgeting the cost of goods sold for the year will be the cost of Goods sold divided by the units:

= 831,060 ÷ 81,000

= $10,26