At 12,000 units of production, a flexible budget would show what?
Scott Manufacturing Co.'s static budget at 10,000 units of production includes $40,000 for direct labor and $4,000 for electric power. Total fixed costs are $23,000. A flexible budget would show:
A. Varible costs of $52,800 and $27,600 of fixed costs.
B. Varible costs of $44,000 and $23,000 of fixed costs.
C. Varible costs of $52,000 and $23,000 of fixed costs.
D. Varible and fixed costs totaling $67,000.
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I wonder if you might have made a mistake in typing in the answer choices. I would say that C is the best possible answer, but it really should have variable costs of $52,800 and not $52,000.
A cannot be the right answer because it has a different level of fixed costs than the budget had at 10,000 units. Fixed costs are fixed; they do not change as the level of production rises.
B and D cannot be right. They both have the same total costs for 12,000 units as for 10,000. This is not possible.
To get the most likely amount of variable costs for the 12,000 units, we need to find the average variable costs (AVCs) at 10,000 units. The total variable costs (TVCs) at that output are $44,000. Divided by 10,000 units, that gives us an AVC of $4.4 per unit. Multiply that by 12,000 units and you get a TVC of $52,800.
So, if the AVC at 12,000 units is the same as the AVC at 10,000 units, then the TVC at 12,000 units must be $52,800.
So, C is the only possible answer, but I would think the TVC should be $52,800 and not $52,000.
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