Phoenix Company’s 2017 master budget included the following fixed budget report.

Question

Phoenix Company’s 2017 master budget included the following fixed budget report. It is based on an expected production and sales volume of 15,000 units.

3. The company’s business conditions are improving. One possible result is a sales volume of 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 2017 budgeted amount of $419,000 if this level is reached without increasing capacity?

PHOENIX COMPANY
Fixed Budget Report
For Year Ended December 31, 2017 Sales $ 3,150,000 Cost of goods sold Direct materials $ 930,000 Direct labor 225,000 Machinery repairs (variable cost) 45,000 Depreciation—Plant equipment (straight-line) 300,000 Utilities ($45,000 is variable) 195,000 Plant management salaries 180,000 1,875,000 Gross profit 1,275,000 Selling expenses Packaging 75,000 Shipping 90,000 Sales salary (fixed annual amount) 235,000 400,000 General and administrative expenses Advertising expense 125,000 Salaries 241,000 Entertainment expense 90,000 456,000 Income from operations $ 419,000

Explanation / Answer

Unit selling price = 3150000/15000= $210 Unit variable cost = (930000+225000+45000+45000+75000+90000)/15000= $94 Unit contribution margin = 210-94= $116 Fixed costs = 300000+(195000-45000)+180000+235000+125000+241000+90000= $1321000 3 Sales(in units) 15000 18000 Contribution margin per unit 116 116 Contribution margin 1740000 2088000 Fixed costs -1321000 -1321000 Operating income 419000 767000 348000 Operating income increase

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