Colt Industries had sales in 2015 of $5.6 million and gross profit of $1.1 milli
ID: 2520043 • Letter: C
Question
Colt Industries had sales in 2015 of $5.6 million and gross profit of $1.1 million. Management is considering two alternative budget plans to increase its gross profit in 2016. See attached..
(SO 2) Prepare sales and pro- duction budgets and calculate the cost per unit under two plans. Colt Industries had sales in 2015 of $5.6 million and gross profit of S1.1 million. Management is considering P10-36A two alternative budget plans to increase its gross profit in 2016 Plan A would increase the selling price per unit from $8.00 to $8.40. Sales volume would decrease by 10% from its 2015 level. Plan B would decrease the selling price per unit by $0.50. The marketing department expects that the sales volume would increase by 100,000 units. At the end of 2015, Colt has 38,000 units of inventory on hand. If Plan A is accepted, the 2016 ending inventory should be equal to 5% of the 2016 sales. If Plan B is accepted, the ending inventory should be equal to 60,000 units. Each unit produced will cost $1.80 in direct labour, $1.30 in direct materials, and $1.20 in variable overhead. The fixed overhead for 2016 should be $1,895,000 Instructions (a) Prepare a sales budget for 2016 under each plan. (b) Prepare a production budget for 2016 under each plan. (c) Calculate the production cost per unit under each plan. Why is the cost per unit different for each of the two plans? (c) Unit cost: Plan A $7.34; Plan B $6.60 (d) Gross profit: Plan A $667,800; Plan B $720,000 (Round to two decimals.) (d) Which plan should be accepted? (Hint: Calculate the gross profit under each plan.)Explanation / Answer
Solution a:
Sales volume of 2015 = $5,600,000 / $8 = 700000 units
Solution b & c:
Cost per unit is different for each of two plans because of fixed manufacturing overhead. Fixed manufacturing overhead will remain the same irrespective of production units. Therefore as volume of production increases, cost per unit will decreases.
Solution d:
Sales Budget - Colt Industries - for the period December 31, 2016 Particulars Plan A Plan B Budgeted Sales Units 630000 800000 Selling price $8.40 $7.50 Total Sales $5,292,000.00 $6,000,000.00