Colt Industries had sales in 2008 of $6,400,000 and gross profit of $1,100,000.
ID: 2386969 • Letter: C
Question
Colt Industries had sales in 2008 of $6,400,000 and gross profit of $1,100,000. Management is considering two alternative budget plans to increase its gross profit in 2009.Plan A would increase the selling price per unit from $8.00 to $8.40. Sales volume would decrease by 5% from its 2008 level. Plan B would decrease the selling price per unit by $0.50. The marketing department expects that the sales volume would increase by 150,000 units.
At the end of 2008, Colt has 40,000 units of inventory on hand. If Plan A is accepted, the 2009 ending inventory should be equal to 5% of the 2009 sales. If Plan B is accepted, the ending inventory should be equal to 50,000 units. Each unit produced will cost $1.80 in direct labor, $1.25 in direct materials, and $1.20 in variable overhead. The fixed overhead for 2009 should be $1,895,000.
How do I prepare a sales budget for 2009 under each plan?
Explanation / Answer
2008 Sales (a) 6,400,000 Sale price per unit (b) 8 Sales (units) (a/b) 800,000 Sale price per unit 8.00 Less: Direct labour per unit 1.80 Direct materials per unit 1.25 Variable overhead per unit 1.20 Contribution per unit 3.75 Plan A Sales price per unit 8.4 Sales unit c=(95% * 800,000) 760,000 Sale price per unit 8.40 Less: Direct labour per unit 1.80 Direct materials per unit 1.25 Variable overhead per unit 1.20 Contribution per unit (d) 4.15 Total Contribution (c*d) 3,154,000 Closing inventory, units = 760,000 * 5% 38,000 Opening invenotry at the beginning of 2009 40,000 Total units to be produced =760000+38000-40000 758,000 Plan B Sales price per unit 7.5 Sales unit c=(150,000 + 800,000) 950,000 Sale price per unit 7.50 Less: Direct labour per unit 1.80 Direct materials per unit 1.25 Variable overhead per unit 1.20 Contribution per unit (d) 3.25 Total Contribution (c*d) 3,087,500 Closing inventory, units = 50,000 Opening invenotry at the beginning of 2009 40,000 Total units to be produced =950000+50000-40000 960,000 Budget for 2009 Plan A Plan B Opening stock (units) 40,000 40,000 Units produced (units) 758,000 960,000 Direct labor 1,364,400 1,728,000 Direct materials 947,500 1,200,000 Variable overhead 909,600 1,152,000 Total expenses 3,221,500 4,080,000 Contribution per unit 4.15 3.25 Sales unit 760,000 950,000 Total contribution 3,154,000 3,087,500 Fixed Overhead 1,895,000 1,895,000 Budgeted Profit 1,259,000 1,192,500 Closing stock units 38,000 50,000