Question

Phoenix Company’s 2017 master budget included the following fixed budget report. It is based on an expected production and sales volume of 15,000 units. PHOENIX COMPANY Fixed Budget Report For Year Ended December 31, 2017 Sales $ 3,150,000 Cost of goods sold Direct materials $ 930,000 Direct labor 210,000 Machinery repairs (variable cost) 45,000 Depreciation—Plant equipment (straight-line) 300,000 Utilities ($30,000 is variable) 180,000 Plant management salaries 200,000 1,865,000 Gross profit 1,285,000 Selling expenses Packaging 90,000 Shipping 105,000 Sales salary (fixed annual amount) 235,000 430,000 General and administrative expenses Advertising expense 125,000 Salaries 241,000 Entertainment expense 80,000 446,000 Income from operations $ 409,000 Required: 1&2. Prepare flexible budgets for the company at sales volumes of 14,000 and 16,000 units and classify all items listed in the fixed budget as variable or fixed.

3. The company’s business conditions are improving. One possible result is a sales volume of 18,000 units. The company president is confident that this volume is within the relevant range of existing capacity. How much would operating income increase over the 2017 budgeted amount of $409,000 if this level is reached without increasing capacity?

4. An unfavorable change in business is remotely possible; in this case, production and sales volume for 2017 could fall to 12,000 units. How much income (or loss) from operations would occur if sales volume falls to this level? (Enter any loss with minus sign.)

Answer 1

Answer 1 and 2.

Planning Budget:

Sales in units = 15,000

Sales = $3,150,000
Selling Price per unit = $3,150,000 / 15,000
Selling Price per unit = $210.00

Direct Materials = $930,000
Direct Materials per unit = $930,000 / 15,000
Direct Materials per unit = $62.00

Direct Labor = $210,000
Direct Labor per unit = $210,000 / 15,000
Direct Labor per unit = $14.00

Machinery Repairs = $45,000
Machinery Repairs per unit = $45,000 / 15,000
Machinery Repairs per unit = $3.00

Utilities = $30,000
Utilities per unit = $30,000 / 15,000
Utilities per unit = $2.00

Packaging = $90,000
Packaging per unit = $90,000 / 15,000
Packaging per unit = $6.00

Shipping = $105,000
Shipping per unit = $1050,000 / 15,000
Shipping per unit = $7.00

Answer 3.

Answer 4.