Question

Bustillo Company operates sight-seeing buses. Management has identified two cost drivers—the number of buses in operation and the number of passengers served —that it uses in its budgeting and performance reports. Data concerning the company’s cost formulas appear below:

	Fixed Cost per Month			Cost per Bus			Cost per Passenger
Vehicle operating costs	$	6,800		$	476		$	4
Advertising	$	2,500
Administrative costs	$	5,300		$	38		$	1.5
Insurance	$	3,900

For example, vehicle operating costs should be $6,800 per month plus $476 per bus plus $4 per passenger. The company’s sales revenue should average $30 per passenger. In July, the company operated 50 buses and served a total of 3,150 passengers. How much is the company’s flexible budget operating income for July?

Answer 1

Computation of the operating income for July is:

Operating income for July = Contribution margin - Total fixed costs

= $51,475 - $18,500

= $32,975

Hence, the operating income for July is $32,975.

1.

Computation of the total revenues is:

Total revenues = Total number of passengers * Sales price per passenger

= 3,150 * $30

= $94,500

Hence, the total revenues is $94,500.

2.

Computation of the variable operating costs is:

Variable operating costs = Number of buses operated * Cost per bus

= 50 * $476

= $23,800

Hence, the variable opearting costs is $23,800.

3.

Computation of the variable operating costs of passengers is:

Variable operating costs of passengers = Number of passengers * Cost per passenger

= 3,150 * $4

= $12,600

Hence, the variable opearting costs of passengers is $12,600.

4.

Computation of the variable administrative costs is:

Variable administrative costs = Number of buses operated * Cost per bus

= 50 * $38

= $1,900

Hence, the variable administrative costs is $1,900.

5.

Computation of the variable administrative costs of passengers is:

Variable administrative costs of passengers = Number of passengers * Cost per passenger

= 3,150 * $1.5

= $4,725

Hence, the variable administrative costs of passengers is $4,725.

6.

Computation of the total variable costs is:

Total variable costs = Variable operating costs + Variable operating costs of passengers + Variable administrative costs + Variable administrative costs of passengers

= $23,800 + $12,600 + $1,900 + $4,725

= $43,025

Hence, the total variable costs is $43,025.

7.

Computation of the contribution margin is:

Contribution margin = Total revenues - Total variable costs

= $94,500 - $43,025

= $51,475

Hence, the contribution margin is $51,475.

8.

Computation of the total fixed costs is:

Total fixed costs = Fixed operating costs + Fixed advertising costs + Fixed administrative costs + Fixed insurance costs

= $6,800 + $2,500 + $5,300 + $3,900

= $18,500

Hence, the total fixed costs is $18,500.