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A firm sets its fixed budget at 100%. The budgeted sales are $300,000 and budgeted net profit is $50,000. Budgeted costs are 70% fixed costs and 30% variable costs.
What is the flexed budget for net profit at 80% capacity?
Sales 300,000 x 80% = 240,000
Variable costs (300,000 – 50,000 x 30% x 80%) = (60,000)Fixed costs ( 300,000 – 50,000 x 70%) = (175,000)
Net profit 5000
Sir John, my confusion is the variable costs why did they find 80% on the variable costs only and not on the fixed costs as well.
Can you explain please
Thank you
Reference: Bpp – Setting Budgets question 11.15 page 95
I do not have the BPP Study Text – only the Revision Kit.
However, as I explain in my free lectures, fixed costs are by definition costs that do not change with the level of production.
So although at 80% capacity the variable costs will only be 80%, the total fixed costs will remain unchanged whatever the capacity.
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