Question

[The following information applies to the questions displayed below.] Phoenix Company’s 2017 master budget included the...

[The following information applies to the questions displayed below.]

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

225,000

Machinery repairs (variable cost)

60,000

Depreciation—Plant equipment (straight-line)

300,000

Utilities ($60,000 is variable)

180,000

Plant management salaries

210,000

1,905,000

Gross profit

1,245,000

Selling expenses

Packaging

90,000

Shipping

90,000

Sales salary (fixed annual amount)

235,000

415,000

General and administrative expenses

Advertising expense

150,000

Salaries

230,000

Entertainment expense

75,000

455,000

Income from operations

$

375,000

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 $375,000 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.)

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