Phoenix Company’s 2017 master budget included the following fixed budget report.
ID: 2580930 • 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.
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 $370,000 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.)
PHOENIX COMPANYFixed Budget Report
For Year Ended December 31, 2017 Sales $ 3,150,000 Cost of goods sold Direct materials $ 945,000 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 200,000 1,910,000 Gross profit 1,240,000 Selling expenses Packaging 90,000 Shipping 105,000 Sales salary (fixed annual amount) 235,000 430,000 General and administrative expenses Advertising expense 125,000 Salaries 230,000 Entertainment expense 85,000 440,000 Income from operations $ 370,000
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.
Explanation / Answer
Q1: 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. Sol1: Variable sales Sales: $3,150,000 / 15,000 units = $210 Variable costs: Direct materials: $945,000 / 15,000 units $63 Direct labor: $225,000 / 15,000 units $15 Machinery repairs: $45,000 / 15,000 units $3 Utilities: $45,000 / 15,000 units $3 Packaging: $90,000 / 15,000 units $6 Shipping: $105,000 / 15,000 units $7 Fixed costs: Utilities ($195,000 – $45,000 is variable) $1,50,000 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 $29,40,000 $33,60,000 Variable costs Direct materials $63 $8,82,000 $10,08,000 Direct labor $15 $2,10,000 $2,40,000 Machinery repairs $3 $42,000 $48,000 Utilities $3 $42,000 $48,000 Packaging $6 $84,000 $96,000 Shipping $7 $98,000 $1,12,000 Total variable costs $97 $13,58,000 $15,52,000 Contribution margin $113 $15,82,000 $18,08,000 Fixed costs Depreciation—plant equipment (straightline $3,00,000 $3,00,000 $3,00,000 Utilities $1,50,000 $1,50,000 $1,50,000 Plant management salaries $2,00,000 $2,00,000 $2,00,000 Sales salary $2,35,000 $2,35,000 $2,35,000 Advertising expense $1,25,000 $1,25,000 $1,25,000 Salaries $2,30,000 $2,30,000 $2,30,000 Entertainment expense $85,000 $85,000 $85,000 Total fixed costs $13,25,000 $13,25,000 $13,25,000 Income from operations ie. (contribution margin - TFC) $2,57,000 $4,83,000 Q2 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 $370,000 if this level is reached without increasing capacity? PHOENIX COMPANY Forecasted Contribution Margin Income Statement For Year Ended December 31, 2017 Sales (in units) 15,000 18,000 Contribution margin (per unit) $113 $113 contribution margin (Sales*Contribution margin per unit) $16,95,000 $20,34,000 Fixed costs $13,25,000 $13,25,000 Operating income $3,70,000 $7,09,000 $3,39,000 sales (units) 18,000 Contribution margin per unit $113 Total contribution margin (Sales*Contribution margin per unit) $20,34,000 Less: Fixed costs -$13,25,000 Potential operating income $7,09,000 vs. Budgeted income for 2017 $3,70,000 Increase in Operating Income $3,39,000 Q3 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.) Sol3 PHOENIX COMPANY Forecasted Contribution Margin Income Statement For Year Ended December 31, 2017 Sales (in units) 15,000 12,000 Contribution margin (per unit) $113 $113 Contribution margin $16,95,000 $13,56,000 Fixed costs $13,25,000 $13,25,000 Operating income (loss) $3,70,000 $31,000 sales (units) 12,000 Contribution margin per unit $113 Total contribution margin (Sales*Contribution margin per unit) $13,56,000 Less: Fixed costs $13,25,000 Potential operating income $31,000