Question

QUESTION 45:

PHOENIX COMPANY Fixed Budget Report For Year Ended December 31, 2017
Sales				$	3,000,000
Cost of goods sold
Direct materials	$	900,000
Direct labor		210,000
Machinery repairs (variable cost)		45,000
Depreciation—Plant equipment (straight-line)		330,000
Utilities ($45,000 is variable)		180,000
Plant management salaries		190,000			1,855,000
Gross profit					1,145,000
Selling expenses
Packaging		90,000
Shipping		105,000
Sales salary (fixed annual amount)		235,000			430,000
General and administrative expenses
Advertising expense		150,000
Salaries		230,000
Entertainment expense		80,000			460,000
Income from operations				$	255,000

PART 1: 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 $255,000 if this level is reached without increasing capacity?

PHOENIX COMPANY
Forecasted Contribution Margin Income Statement
For Year Ended December 31, 2017
Sales (in units)	15,000	18,000	-1
Contribution margin (per unit)
Contribution margin
Fixed costs
Operating income

PART 2: 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.)

PHOENIX COMPANY: Forecasted Contribution Margin Income StatementFor Year Ended December 31, 2017: Sales (in units)15,00012,000Contribution margin (per unit)Contribution marginFixed costsOperating income (loss)

Answer 1

Fixed cost remains the same till some level of capacity utilization and does not increases with the increase in the production. If production is increased up to the capacity of the plant than the Fixed cost will not be increased.

Variable cost increases with every new unit being produced and this cost keep on increasing as the production is increased.

So first we have to calculate the per unit cost of the production.

This can be done by diving the total cost by 15000 units.

hence if the productions falls to the level of 12K than the profit will only be 26K