Question

Pauley Company provides home health care. Pauley charges $35/hour for professional care. Variable costs are $21/hour and fixed costs are $78,000. Next year, Pauley expects to charge out 12,000 hours of home health care. What is the budgeted operating income?

	a.	$168,000
	b.	$420,000
	c.	$174,000
	d.	$90,000
	e.	$342,000

Answer 1

Generally, a business have dual segment i.e. Operating and Non operating. For e.g. for a Bakery, Baking bread and selling is the operating segment while income from any investment is related to non operating segment.

Operating income is calculated as net of revenue from operating activities arrived after deducting all operating expenses whether fixed or variable. Further, if we exclude fixed cost from the above calculations than it is known as contribution margin.

In the given case,

Total hours = 12000

Prof. Care = $35/hr

Variable cost = $21/hour

Fixed cost = $78000

Net Operating income = Total Revenue - Variable cost - Fixed cost

= (12000 hours x $35) - (12000 hours x $21) - ($78000)

= $420,000 - $252,000 - $78000

= $90,000

Just for information -

Further, Contribution Margin = Total Revenue - Variable Cost

= (12000 hours x $35 ) - (12000 hours x $21)

= $420,000 - $252,000

= $168,000