[BenB]

Cook Co.’s total costs of operating five sales offices last year was $500,000, of which $70,000 represented fixed costs. Cook has determined that total costs are significantly influenced by the number of sales offices operated. Last year’s costs and number of sales offices can be used as the basis for predicting annual costs. What would be the budgeted costs for the coming year if Cook were to operate seven sales offices?

A.
$700,000
B.
$672,000
C.
$614,000
D.
$586,000

The answer is B, the solution is here:
otal cost last year $500,000
Less fixed cost -70,000
——–
Variable cost for five offices $430,000

Variable cost per office = $430,000 / 5 = $86,000

Variable cost for seven offices = 7 x 86,000 = $602,000
Add fixed costs 70,000
——–
Total cost of operating seven offices = $672,000
========

The problem I have with this is that wouldn’t it reasonable to think that you’d be adding fixed costs when operating seven sales offices?

FAR 7/11/16 - 87
BEC 9/9/16
REG TBD
AUD TBD