Phoenix Company’s 2017 master budget included the following fixed budget report.
ID: 2522902 • Letter: P
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.
Required:
1&2. 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 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 $384,000 if this level is reached without increasing capacity?
An unfavorable change in business is remotely possible; in this case, production and sales volume for 2017 could fall to 12,000 units. How much income (or loss) from operations would occur if sales volume falls to this level? (Enter any loss with minus sign.)
Please show all parts, thank you!
PHOENIX COMPANYFixed Budget Report
For Year Ended December 31, 2017 Sales $ 3,150,000 Cost of goods sold Direct materials $ 900,000 Direct labor 210,000 Machinery repairs (variable cost) 60,000 Depreciation—Plant equipment (straight-line) 315,000 Utilities ($45,000 is variable) 210,000 Plant management salaries 210,000 1,905,000 Gross profit 1,245,000 Selling expenses Packaging 90,000 Shipping 90,000 Sales salary (fixed annual amount) 235,000 415,000 General and administrative expenses Advertising expense 125,000 Salaries 241,000 Entertainment expense 80,000 446,000 Income from operations $ 384,000
Explanation / Answer
Answer:
1
PHOENIX COMPANY
Fixed Budget Report
For Year Ended December 31, 2017
Flexible Budget
Flexible Budget for:
Variable Amount per Unit
Total Fixed Cost
Units Sales of 14,000
Unit Sales of 16,000
Sales
210
2940000
3360000
Variable costs
Direct materials
60
840000
960000
Direct labor
14
196000
224000
Machinery repairs (variable cost)
4
56000
64000
Utilities ($45,000 is variable)
3
42000
48000
Packaging
6
84000
96000
Shipping
6
84000
96000
Total variable cost
93
1302000
1488000
Contribution margin
1638000
1872000
Fixed cost
Utilities ($45,000 is variable)
165,000
165,000
165,000
Plant management salaries
210,000
210,000
210,000
Depreciation—Plant equipment (straight-line)
315,000
315,000
315,000
Sales salary (fixed annual amount)
235,000
235,000
235,000
Advertising expense
125,000
125,000
125,000
Salaries
241,000
241,000
241,000
Entertainment expense
80,000
80,000
80,000
Total Fixed Exp
1,371,000
1,371,000
1,371,000
Income from operations
267,000
501,000
Calculation of the varable cost per unit
A
B=A/150000
Sales
3150000
210
variable cost
Direct materials
900000
60
Direct labor
210000
14
Machinery repairs (variable cost)
60000
4
Utilities ($45,000 is variable)
45000
3
Packaging
90000
6
Shipping
90000
6
Total variable cost
1395000
Fixed cost
Utilities ($45,000 is variable)
165,000
Plant management salaries
210000
Depreciation—Plant equipment (straight-line)
315000
Sales salary (fixed annual amount)
235000
Advertising expense
125000
Salaries
241000
Entertainment expense
80000
Total Fixed Exp
1,371,000
Income from operations
384,000
__________________________________
2
PHOENIX COMPANY
Forecasted Contribution Margin Income Statement
For Year Ended December 31, 2017
Sales (in units)
15,000
18,000
Contribution margin (per unit)
117
117
Contribution margin
1755000
2106000
Fixed costs
1,371,000
1371000
Operating income
384,000
735,000
351,000
Operating income increase
___________________________________
3
PHOENIX COMPANY
Forecasted Contribution Margin Income Statement
For Year Ended December 31, 2017
Sales (in units)
15,000
12,000
Contribution margin (per unit)
117
117
Contribution margin
1755000
1404000
Fixed costs
1371000
1371000
Operating income (loss)
384000
33000
-351,000
Operating income Decreases
PHOENIX COMPANY
Fixed Budget Report
For Year Ended December 31, 2017
Flexible Budget
Flexible Budget for:
Variable Amount per Unit
Total Fixed Cost
Units Sales of 14,000
Unit Sales of 16,000
Sales
210
2940000
3360000
Variable costs
Direct materials
60
840000
960000
Direct labor
14
196000
224000
Machinery repairs (variable cost)
4
56000
64000
Utilities ($45,000 is variable)
3
42000
48000
Packaging
6
84000
96000
Shipping
6
84000
96000
Total variable cost
93
1302000
1488000
Contribution margin
1638000
1872000
Fixed cost
Utilities ($45,000 is variable)
165,000
165,000
165,000
Plant management salaries
210,000
210,000
210,000
Depreciation—Plant equipment (straight-line)
315,000
315,000
315,000
Sales salary (fixed annual amount)
235,000
235,000
235,000
Advertising expense
125,000
125,000
125,000
Salaries
241,000
241,000
241,000
Entertainment expense
80,000
80,000
80,000
Total Fixed Exp
1,371,000
1,371,000
1,371,000
Income from operations
267,000
501,000