Arlo's T-shirt Shop only has three costs: T-shirt cost, rent cost on the shop, and utilities cost. Arlo's sells the T-shirts for $14.50 each. Management has prepared the following cost information for next month:??At 8,000At 10,000??T-shirtsT-shirts?T-shirt cost$48,000$60,000?Rent cost$3,600$3,600?Utilities cost$6,800$8,300Assume that all of the activity levels mentioned in this problem are within the relevant range.Required:a. Calculate Arlo's total variable cost if 9,000 T-shirts are sold next month.b. Prepare Arlo's contribution format income statement if 10,000 T-shirts are sold.
What will be an ideal response?
a.
T-shirt cost
Variable cost per unit = Change in cost ÷ Change in activity
= ($60,000 ? $48,000) ÷ (10,000 T-shirts ? 8,000 T-shirts)
= $12,000 ÷ 2,000 T-shirts
= $6 per T-shirt
Fixed cost = Total cost ? Total variable cost
= $48,000 ? (8,000 T-shirts × $6 per T-shirt)
= $0
Rent cost is fixed at $3,600 per month.
Utilities cost:
Variable cost per unit = Change in cost ÷ Change in activity
= ($8,300 ? $6,800) ÷ (10,000 T-shirts ? 8,000 T-shirts)
= $1,500 ÷ 2,000 T-shirts
= $0.75 per T-shirt
Fixed cost = Total cost ? Total variable cost
= $8,300 ? (8,000 T-shirts × $0.75 per T-shirt)
= $2,300
Y = $2,300 + $0.75X
| ? | T-shirt cost ($6 per T-shirt × 9,000 T-shirts) | $54,000 |
| ? | Utilities cost ($0.75 per T-shirt × 9,000 T-shirts) | 6,750 |
| ? | Total variable cost | $60,750 |
b.
| ? | Arlo's T-Shirt Shop Contribution Format Income Statement Monthly Sales Volume of 10,000 T-Shirts | ||
| ? | ? | ||
| ? | ? | ||
| ? | Sales ($14.50 per unit × 10,000 units) | ? | $145,000 |
| ? | Variable expenses: | ? | ? |
| ? | T-shirt cost ($6 per unit × 10,000 units) | $60,000 | ? |
| ? | Utilities cost ($0.75 per unit × 10,000 units) | 7,500 | 67,500 |
| ? | Contribution margin | ? | 77,500 |
| ? | Fixed expenses: | ? | ? |
| ? | Rent cost | 3,600 | ? |
| ? | Utilities cost | 2,300 | 5,900 |
| ? | Net operating income | ? | $ 71,600 |
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