Relevant Range Question Accounting Need Help

Question

A company's variable cost per unit is $2. It sold 20,000 units and earned $15,000 operating income after a total cost of $55,000. What would be the total operating income the company can earn at a sales volume of 35,000 units, assuming that is within the relevant range?
A) 30,000 B) 40,000 C) 45,000 D) 37,500 E)can't be determined

 

answer was d) but i need exact help with steps as to how.

Answer 1

Hello Sagnik!  

 

To answer this question, we need to find a few bits of information:

 

Sales price per unit: $3.50 -- We know that the company earned $70,000 (operating income 15,000 + costs 55,000) in revenues when it sold 20,000 units, so we can find the sales price per unit by taking $70,000/20,000.  Therefore, the sales price per unit is $3.50.

Variable cost per unit: $2.00 -- This is given.

Total fixed cost: $15,000 -- When we sell 20,000 units, we have total costs of $55,000.  We can work backwards to find the total fixed cost.  Total variable cost for 20,000 units would be $40,000, so our fixed cost would be $15,000 (total costs 55,000 - variable costs 40,000).

 

For help reiterate how the 20,000 sales volume works, take a look at what happens we we plug this information into

the formula for net operating income:

 

Sales - variable costs - fixed costs = operating income

20,000(3.50) - 20,000(2.00) - 15,000 = 15,000

 

Now let's use that same formula to find the total operating income at that new sales volume of 35,000 units. :)

 

35,000(3.50) - 35,000(2.00) - 15,000 = ?

Operating income = $37,500

 

Therefore, your answer is D) 37,500

 

Feel free to let me know if you need any further assistance.  I provide remote help if you need some problems explained over email. :)

 

Have a great day!