The following income statements are provided for Li Companys

The following income statements are provided for Li Company\'s last two years of 2012 2013 Number of units produced and sold Sales revenue Cost of goods sold 3,700 4100 $69,700 55,760 49,960 Gross margin General, selling and administrative expenses 13,940 12,620 2,940 11,740 Net income $1,320 $1.200 Assuming that cost behavior did not change over the two year period, what is the O $11740 O $3100 O $12.620 $3,600

Solution

In cost behaviour analysis, it is analysed how costs change when there is change in level of activity.

There are some mixed cost which include both variable and fixed element. In other words, such type of cost have fixed cost which does not change with change in level of activity and there is a variable cost which changes with change in level of activity.

Since it is given in question that cost behaviour did not change over the two year period, it means there is a certain annual fixed general, selling and administrative cost which remains same with change in level of activity.

Formula=

Variable cost per unit =

Change in mixed cost in two year period / change in number of units

= $ 12620 - $11740 / 4100 units - 3700 units

= $880 / 400 units

= $2.2 per unit

= Annual fixed general selling and administrative cost

For year 2012=

$12620 - ( $2.2 × 4100 units)

$12620 - $9020

= $3600

For year 2013=

$11740 - ($2.2 × 3700)

$11740 - $8140

= $3600

Therefore, answer is option 4th , $3600.