The following information applies to the questions displayed below.]
| Phoenix Company’s 2013 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, 2013 |
| Sales | $ | 3,300,000 | |||
| Cost of goods sold | |||||
| Direct materials | $ | 930,000 | |||
| Direct labor | 225,000 | ||||
| Machinery repairs (variable cost) | 45,000 | ||||
| Depreciation—plant equipment | 330,000 | ||||
| Utilities ($30,000 is variable) | 210,000 | ||||
| Plant management salaries | 210,000 | 1,950,000 | |||
|
|
|
|
|
||
| Gross profit | 1,350,000 | ||||
| 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 | 85,000 | 451,000 | |||
|
|
|
|
|
||
| Income from operations | $ | 469,000 | |||
|
|
|
||||
|
|
|||||
| Phoenix Company’s 2013 master budget included the following fixed budget report. It is based on an expected production and sales volume of 15,000 units. |
| 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.
The company’s business conditions are improving. One possible result is a sales volume of approximately 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 2013 budgeted amount of $469,000 if this level is reached without increasing capacity?
|
| Variable or Fixed Classification | |
| Particular | Amount in $ |
| Variable sales (total divided by 15,000 units) Sales. |
220 |
| Less: | |
| Variable costs (total divided by 15,000 units) | |
| Direct materials | 62 |
| Direct labor | 15 |
| Machinery repairs | 3 |
| Utilities ($30,000 variable). | 2 |
| Packaging | 6 |
| Shipping | 7 |
| Total variable costs | 95 |
| Fixed costs | |
| Depreciation—Plant equipment | 330000 |
| Utilities ($210,000 – $30,000 variable) | 180000 |
| Plant management salaries | 210000 |
| Sales salary | 235000 |
| Advertising expense | 125000 |
| Salaries | 241000 |
| Entertainment expense | 85000 |
| Total fixed costs | 1406000 |
Now we will prepare Flexible Budget Report For 14000 and 16000 units
As under
| PHOENIX COMPANY | ||
| Flexible Budget Report | ||
| For the year ended 2013 | ||
| Sales Volume 14000 |
Sales Volume 16000 |
|
| Particular | Amount in $ | |
| Sales Unit | 14000 | 16000 |
| Sales Price | 220 | 220 |
| Sales | 3080000 | 3520000 |
| Less: | ||
| Direct materials | 868000 | 992000 |
| Direct labor | 210000 | 240000 |
| Machinery repairs | 42000 | 48000 |
| Utilities | 28000 | 32000 |
| Packaging | 84000 | 96000 |
| Shipping | 98000 | 112000 |
| Total variable costs | 1330000 | 1520000 |
| Fixed costs | ||
| Depreciation—Plant equipment | 330000 | 330000 |
| Utilities | 180000 | 180000 |
| Plant management salaries | 210000 | 210000 |
| Sales salary | 235000 | 235000 |
| Advertising expense | 125000 | 125000 |
| Salaries | 241000 | 241000 |
| Entertainment expense | 85000 | 85000 |
| Total fixed costs | 1406000 | 1406000 |
| Net Profit | 344000 | 594000 |
The company’s business conditions are improving. One possible result is a sales volume of approximately 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 2013 budgeted amount of $469,000 if this level is reached without increasing capacity?
Answer : Increase in the profit by $ 375000
Working notes for the above answer is as under
| sales volume of approximately 18,000 units | |
| PHOENIX COMPANY | |
| Flexible Budget Report | |
| Sales Volume 18000 |
|
| Particular | Amount in $ |
| Sales Unit | 18000 |
| Sales Price | 220 |
| Sales | 3960000 |
| Less: | |
| Direct materials | 1116000 |
| Direct labor | 270000 |
| Machinery repairs | 54000 |
| Utilities | 36000 |
| Packaging | 108000 |
| Shipping | 126000 |
| Total variable costs | 1710000 |
| Fixed costs | |
| Depreciation—Plant equipment | 330000 |
| Utilities | 180000 |
| Plant management salaries | 210000 |
| Sales salary | 235000 |
| Advertising expense | 125000 |
| Salaries | 241000 |
| Entertainment expense | 85000 |
| Total fixed costs | 1406000 |
| Net Profit | 844000 |
| Less: | |
| Current Profit | 469000 |
| Increase in Profit | 375000 |
An unfavorable change in business is remotely possible; in this case, production and sales volume for 2013 could fall to 12,000 units. How much income (or loss) from operations would occur if sales volume falls to this level
Answer
Decrease in Profit $(375,000)
Working notes for the above answer
| sales volume of approximately 12,000 units | |
| PHOENIX COMPANY | |
| Flexible Budget Report | |
| Sales Volume 12000 |
|
| Particular | Amount in $ |
| Sales Unit | 12000 |
| Sales Price | 220 |
| Sales | 2640000 |
| Less: | |
| Direct materials | 744000 |
| Direct labor | 180000 |
| Machinery repairs | 36000 |
| Utilities | 24000 |
| Packaging | 72000 |
| Shipping | 84000 |
| Total variable costs | 1140000 |
| Fixed costs | |
| Depreciation—Plant equipment | 330000 |
| Utilities | 180000 |
| Plant management salaries | 210000 |
| Sales salary | 235000 |
| Advertising expense | 125000 |
| Salaries | 241000 |
| Entertainment expense | 85000 |
| Total fixed costs | 1406000 |
| Net Profit | 94000 |
| Less: | |
| Current Profit | 469000 |
| Decrease in Profit | -375000 |
