Question

McElroy Company has prepared the following master budget for 2016. Although McElroy has the capacity to...

McElroy Company has prepared the following master budget for 2016. Although McElroy has the capacity to manufacture 50,000 units, management expected the likely demand for its product to be 40,000 units in 2016; as such, it prepared the master budget to manufacture and sell 40,000 units. In early January 2017, the company was pleasantly surprised to find out that it manufactured and sold 45,000 units in 2016.

McElroy Company
Master (Static) Budget
For Year Ending December 31, 2016

Sales

$2,800,000

Cost of Goods Sold:

   Direct materials

$800,000

   Direct labor

300,000

   Indirect materials (variable)

24,000

   Indirect labor (variable)

36,000

   Depreciation

300,000

   Salaries

200,000

   Utilities (80% fixed)

100,000

   Maintenance (40% variable)

    50,000

1,810,000

Gross profit

$990,000

Operating expenses:

   Commissions (5% of sales)

$140,000

   Advertising (fixed)

    150,000

   Wages (variable)

    100,000

   Rent (fixed)

     50,000

   Total operating expenses

   440,000

Operating Income

$550,000

Prepare the flexible budget (FB) for the actual operating level achieved in 2016.

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