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8 February, 18:05

he following static budget is provided: Units 22,000 Units Sales $ 220,000 Less variable costs: Manufacturing costs $ 77,000 Selling and administrative costs $ 44,000 Contribution margin $ 99,000 Less fixed costs: Manufacturing costs $ 30,800 Selling and administrative costs $ 18,700 Net income $ 49,500 What will budgeted net income equal if 20,000 units are produced and sold?

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  1. 8 February, 18:34
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    Net income = $ 40,500 (assuming fixed costs remain constant)

    Net income = $ 45,000 when fixed costs do not remain constant.

    Explanation:

    We calculate the unit price by dividing the total cost by the number of units.

    Units 22,000

    Units Sales $ 220,000 / 22,000 = $ 10

    Less variable costs:

    Manufacturing costs $ 77,000 / 22,000 = $3.5

    Selling and administrative costs $ 44,000 / 22,000 = $2

    Contribution margin $ 99,000

    Less fixed costs:

    Manufacturing costs $ 30,800

    Selling and administrative costs $ 18,700

    Net income $ 49,500

    We apply the unit costs to the number of units given to get the net income for 20,000 units.

    Units 20,000

    Units Sales $ 10*20,000 = $ 200,000

    Less variable costs:

    Manufacturing costs $3.5*20,000 = $ 70,000

    Selling and administrative costs $2*20,000 = $ 40,000

    Contribution margin $ 90,000

    Less fixed costs:

    Manufacturing costs $ 30,800 (assuming fixed costs remain constant)

    Selling and administrative costs $ 18,700 (assuming fixed costs remain constant)

    Net income $ 40,500

    When fixed costs also change.

    Units 20,000

    Units Sales $ 10*20,000 = $ 200,000

    Less variable costs:

    Manufacturing costs $3.5*20,000 = $ 70,000

    Selling and administrative costs $2*20,000 = $ 40,000

    Contribution margin $ 90,000

    Less fixed costs:

    Manufacturing costs ($ 30,800 / 22,000) * 20,000 = 28,000

    Selling and administrative costs ($ 18,700 / 22,000) * 20,000 = 17,000

    Net income $ 45,000
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