Question

Tempo Company's fixed budget (based on sales of 16,000 units) for the first quarter reveals the following.

	Fixed Budget
Sales (16,000 units × $209 per unit)						$	3,344,000
Cost of goods sold
Direct materials		$	400,000
Direct labor			688,000
Production supplies			448,000
Plant manager salary			200,000				1,736,000
Gross profit							1,608,000
Selling expenses
Sales commissions			128,000
Packaging			240,000
Advertising			100,000				468,000
Administrative expenses
Administrative salaries			250,000
Depreciation—office equip.			220,000
Insurance			190,000
Office rent			200,000				860,000
Income from operations						$	280,000

(1) Compute the total variable cost per unit.
(2) Compute the total fixed costs.
(3) Compute the income from operations for sales volume of 14,000 units.
(4) Compute the income from operations for sales volume of 18,000 units.

Answer 1

Ans. 1	Variable cost per unit = Particular variable cost / Units sold
	Direct materials	$400,000 / 16,000	$25.00	per unit
	Direct labor	$688,000 / 16,000	$43.00	per unit
	Production supplies	$448,000 / 16,000	$28.00	per unit
	Sales commissions	$128,000 / 16,000	$8.00	per unit
	Packaging	$240,000 / 16,000	$15.00	per unit
	Total variable cost per unit		$119.00	per unit
Ans. 2	Fixed costs:
	Plant manager salary	$200,000
	Advertising	$100,000
	Administrative salaries	$250,000
	Depreciation - Office equipment	$220,000
	Insurance	$190,000
	Office rent	$200,000
	Total fixed cost	$1,160,000
Ans. 3
	Particulars	Amount
	Sales (14,000 *$209)	$2,926,000
	Less: Variable expenses (14,000 * $119)	$1,666,000
	Contribution margin	$1,260,000
	Less: Fixed expenses	$1,160,000
	Income from operations	$100,000
Ans. 4	Particulars	Amount
	Sales (18,000 *$209)	$3,762,000
	Less: Variable expenses (18,000 * $119)	$2,142,000
	Contribution margin	$1,620,000
	Less: Fixed expenses	$1,160,000
	Income from operations	$460,000
	*Sales = Selling price * Sales units
	*Variable expenses = Variable cost per unit * Sales units
	*Fixed expenses remain constant on each level of sales.