Question

Baskin Promotions, Inc. sells T-shirts decorated for a variety of concert performers. The company has developed the following budget for the coming year based on a sales forecast of 80,000 T-shirts:

Sales	$	1,400,000
Cost of Goods Sold		820,000
Gross Profit		580,000
Operating Expenses ($100,000 is fixed)		418,400
Operating Income		161,600
Income Taxes (30% of operating income)		48,480
Net Income	$	113,120

Cost of goods sold and variable operating expenses vary directly with sales, and the income tax rate is 30% at all levels of operating income.

If the concert season is slow due to poor weather, Baskin estimates that sales could fall to as low as 60,000 T-shirts.

a.       In a flexible budget for sales of 60,000 T-shirts, how much would Baskin budget for operating expenses?

b.       Assume Baskin actually achieves the 60,000 unit sales level, and that net income actually earned at this level was $70,000. How would a performance report reflect net income? Over budget? Under budget? Or at budget? If over/under; by how much?

Answer 1

Flexible budget at 60000 T - shirts ( Baskin promotions )
Sales ( 1400000 / 80000 ) * 60000	1050000
Less:- COGS ( 820000 / 80000 ) * 60000	615000
GP	435000
less:-
Variable Operating exp. ( 318400 / 80000 ) * 60000	238800
Fixed Operating exp.	100000
Total Operating exp.	338800	Answer a
Operating income	96200
Less:- Income taxes ( 30 % )	28860
Budgeted Net income	67340
Actual Net income	70000
Under budget	2660	Answer b