Adrian T. Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. Sales units 5000 10000 Cost of goods sold $117000 $193000 Selling and Administrative costs $588000 $637000 Selling price per unit $170 $170 Q: The best estimate of the net operating income if 6620 units are sold is:

net operating income = $379,900

Explanation:

we can use the high-low cost method to determine the fixed and variable manufacturing costs:

variable cost per unit = (highest activity cost - lowest activity cost) / (highest activity units - lowest activity units) = ($193,000 - $117,000) / (10,000 - 5,000) = $76,000 / 5,000 = $15.20 per unit

fixed costs = highest activity cost - (variable cost per unit x highest activity units) = $193,000 - ($15.20 x 10,000) = $193,000 - $152,000 = $41,000

cost of goods sold for 6,620 units = (6,620 x $15.20) + $41,000 = $141,624

now we do the same for the administrative expenses:

variable cost per unit = ($637,000 - $588,000) / (10,000 - 5,000) = $49,000 / 5,000 = $9.80

fixed costs = $637,000 - ($9.80 x 10,000) = $637,000 - $98,000 = $539,000

S&A expenses for 6,620 units = (6,620 x $9.80) + $539,000 = $603,876

net income = $1,125,400

- COGS = $141,624

gross profit = $983,776

- S&A expenses = $603,876

net operating income $379,900