Question

Polyfield Manufacturing prepares their annual budgets at the beginning of the year along with a mid-year update in June for any changes in estimates or business conditions. When the budget was prepared for the year, management made the following estimates for the month of July assuming sales of 65,000 units which sell for $10 each.

Sales	$650,000
Cost of Goods Sold	$406,250
Gross Profit	$243,750
Operating Expenses
Selling expenses (variable)	$58,500
Selling expenses (fixed)	$35,000
Administrative expenses	$22,000
Income before tax	$128,250
Tax expense	$26,933
Net income	$101,318

You are working as Polyfield’s cost accountant, and management comes to you in June with some news about the projections for July. They recently received a large unexpected order from one of their biggest customers. Instead of 65,000 units, management is expecting to sell 85,000 units in July. They would like to see what the budget will look like assuming 85,000 units are sold rather than 65,000. Management assumes that the tax rate will remain unchanged.

Part II Requirement:

Use the information above to prepare a flexible budget for the month of July assuming 85,000 units will be sold. Assume that the company has existing capacity and will not incur any additional fixed costs.

Answer 1

Flexible Budget for 85,000 units for the month of July

Particulars	Amount
Sales (85,000 units X $10)	$8,50,000
Less: Cost of Goods Sold ($4,06,250 / 65,000 units) X 85,000 units	$5,31,250
Gross Profit	$3,18,750
Operating Expenses
Less: Variable Selling Expenses ($58,500 / 65,000 units) X 85,000 units	$76,500
Less: Fixed Selling Expenses	$35,000
Less: Administrative Expenses (Assumed to be a Fixed Cost. Mostly Administrative Overheads are of Fixed nature)	$22,000
Income Before Tax	$1,85,250
Less: Tax Exepense ($26,933 / $128,250 ) X $185,250	$38,903
Net Income	$1,46,347