Colt Industries had sales in 2010 of $6,400,000 and gross profit of $1,100,000.
ID: 2389584 • Letter: C
Question
Colt Industries had sales in 2010 of $6,400,000 and gross profit of $1,100,000. Management is considering two alternative budget plans to increase its gross profit in 2011.Plan A would increase the selling price per unit from $8.00 to $8.40. Sales volume would decrease by 5% from its 2010 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 2010, Colt has 40,000 units of inventory on hand. If Plan A is accepted, the 2011 ending inventory should be equal to 5% of the 2011 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.
Explanation / Answer
If sales in 2010 were $6,400,000, and the unit price was $8.00, that means that 800,000 units were sold in 2010. So, for plan A: 760,000 units will be sold at $8.40, resulting in sales of $6,384,000. Beginning inventory was 40,000 units. Ending inventory is 5% of 2011 sales, which is 38,000 units. This means that 762,000 units were produced throughout the year, resulting in ($1.80+$1.25+$1.20)*762,000 = $3,238,500 variable cost. Fixed overhead is $1,895,000. $6,384,000-$3,238,500-$1,895,000 = Gross Profit of $1,251,000 for Plan A. For plan B: 950,000 units will be sold for $7.50, resulting in sales of $7,125,000. Beginning inventory was 40,000 units. Ending inventory for plan B is 50,000 units. This means that 960,000 units were produced, resulting in ($1.80+$1.25+$1.20)*950,000 = $4,037,500 variable cost. Fixed overhead is $1,895,000. $7,125,000-$4,037,500-$1,895,000 = Gross Profit of $1,192,500. Therefore, it would be more profitable to go with Plan A.