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.

PHOENIX COMPANY Fixed Budget Report For Year Ended December 31, 2017
Sales				$	3,300,000
Cost of goods sold
Direct materials	$	915,000
Direct labor		225,000
Machinery repairs (variable cost)		60,000
Depreciation—Plant equipment (straight-line)		315,000
Utilities ($45,000 is variable)		195,000
Plant management salaries		200,000			1,910,000
Gross profit					1,390,000
Selling expenses
Packaging		90,000
Shipping		105,000
Sales salary (fixed annual amount)		235,000			430,000
General and administrative expenses
Advertising expense		100,000
Salaries		230,000
Entertainment expense		80,000			410,000
Income from operations				$	550,000

Problem 23-1A Part 1&2

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.

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 $550,000 if this level is reached without increasing capacity?

4. 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.)

Answer 1

Solution 1&2:

Phoenix Company
Flexible Budget for 2017
Particulars	Flexible Budget		Flexible Budget For
	Variable amount per unit	Total Fixed Cost	Volume - 14000 units	Volume - 16000 units
Sales	$220.00		$30,80,000.00	$35,20,000.00
Variable costs:
Direct materials	$61.00		$8,54,000.00	$9,76,000.00
Direct labor	$15.00		$2,10,000.00	$2,40,000.00
Machinery repairs	$4.00		$56,000.00	$64,000.00
Utilities	$3.00		$42,000.00	$48,000.00
Packaging	$6.00		$84,000.00	$96,000.00
Shipping	$7.00		$98,000.00	$1,12,000.00
Total Variable costs	$96.00		$13,44,000.00	$15,36,000.00
Contribution margin	$124.00		$17,36,000.00	$19,84,000.00
Fixed Costs:
Depreciation—Plant equipment		$3,15,000.00	$3,15,000.00	$3,15,000.00
Utilities		$1,50,000.00	$1,50,000.00	$1,50,000.00
Plant management salaries		$2,00,000.00	$2,00,000.00	$2,00,000.00
Sales Salaries		$2,35,000.00	$2,35,000.00	$2,35,000.00
Advertising expense		$1,00,000.00	$1,00,000.00	$1,00,000.00
Salaries		$2,30,000.00	$2,30,000.00	$2,30,000.00
Entertainment expense		$80,000.00	$80,000.00	$80,000.00
Total Fixed Costs		$13,10,000.00	$13,10,000.00	$13,10,000.00
Net Operating Income			$4,26,000.00	$6,74,000.00

Solution 3:

Phoenix Company
Forecasted contribution margin income statement
For the year ended December 31, 2017
Sales (In units)	15000	18000
Contribution margin per unit	$124.00	$124.00
Contribution margin	$18,60,000.00	$22,32,000.00
Fixed costs	$13,10,000.00	$13,10,000.00
Operating income (Loss)	$5,50,000.00	$9,22,000.00	$3,72,000.00	Operating Income Increase

Solution 4:

Phoenix Company
Forecasted contribution margin income statement
For the year ended December 31, 2017
Sales (In units)	15000	12000
Contribution margin per unit	$124.00	$124.00
Contribution margin	$18,60,000.00	$14,88,000.00
Fixed costs	$13,10,000.00	$13,10,000.00
Operating income (Loss)	$5,50,000.00	$1,78,000.00