Baylor, Inc

question 75

Multiple Choice

Baylor, Inc. just finished its second year of operations. In the first year it produced 1,000 units and sold 400. The second year resulted in the same production level, but sales were 1,200 units. The variable costing income statements for both years are shown below: Year 1 Year 2
Sales $ 40,000 $120,000
Variable cost of goods sold $22,000 $66,000
Variable selling and administration 800 22,800 2,400 68,400
Contribution margin 17,200 51,600
Fixed overhead 30,000 30,000
Fixed selling and administration 15,000 45,000 15,000 45,000
Operating income $(27,800) $ 6,600
The operating income for year 2 using absorption costing would be:

• A)$(9,800)
• B)$600
• C)$(9,000)
• D)$6,000

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Definitions:

Times Interest Earned

A financial ratio measuring a company's ability to meet its interest obligations from operating earnings, calculated as income before interest and taxes divided by interest expense.

Interest Expense

The financial outlay associated with an entity's use of borrowed resources over time.

Times Interest Earned Ratio

A financial metric used to measure the company's ability to meet its debt obligations by comparing its income before interest and taxes to its interest expenses.

Interest Expense

The cost incurred by an entity for borrowed funds, typically reflected in income statements as a cost of financing operations.