Question

Phoenix Company’s 2019 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, 2019
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)		330,000
Utilities ($60,000 is variable)		210,000
Plant management salaries		190,000			1,945,000
Gross profit					1,205,000
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		241,000
Entertainment expense		75,000			441,000
Income from operations				$	334,000

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 budgeted amount of $334,000 if this level is reached without increasing capacity?

	PHOENIX COMPANY Forecasted Contribution Margin Income Statement For Year Ended December 31, 2019 Sales (in units) 15,000 18,000 Contribution margin (per unit) Contribution margin Fixed costs Operating income

4. An unfavorable change in business is remotely possible; in this case, production and sales volume for the year could fall to 12,000 units. How much income (or loss) from operations would occur if sales volume falls to this level?

	PHOENIX COMPANY Forecasted Contribution Margin Income Statement For Year Ended December 31, 2019 Sales (in units) 15,000 12,000 Contribution margin (per unit) Contribution margin Fixed costs Operating income (loss)

Answer 1

1&2)

Phoenix Company
Flexible Budgets
For Year Ended December 31,2019
	Flexible Budget	Flexible Budget for
	Variable Amount per unit	Total Fixed Cost	Unit Sales of 14,000	Unit Sales of 16,000
Sales	210.00		2,940,000.00	3,360,000.00
Variable costs
Direct Material	63.00		882,000.00	1,008,000.00
Direct Labor	15.00		210,000.00	240,000.00
Machinery Repair	3.00		42,000.00	48,000.00
Utilities	4.00		56,000.00	64,000.00
Packaging	6.00		84,000.00	96,000.00
Shipping	7.00		98,000.00	112,000.00
Total Variable costs	98.00		1,372,000.00	1,568,000.00
Contribution Margin	112.00		1,568,000.00	1,792,000.00
Fixed costs
Depreciation-Plant Equipment		330,000.00	330,000.00	330,000.00
Utilities		150,000.00	150,000.00	150,000.00
Plant Management Salaries		190,000.00	190,000.00	190,000.00
Sales Salary		235,000.00	235,000.00	235,000.00
Advertising		125,000.00	125,000.00	125,000.00
Salaries		241,000.00	241,000.00	241,000.00
Entertainment Expense		75,000.00	75,000.00	75,000.00
Total Fixed costs		1,346,000.00	1,346,000.00	1,346,000.00
Income from Operations			222,000.00	446,000.00

3.

Phoenix Company
Forecasted Contribution Margin income Statement
For Year Ended December 31,2019
Sales in units	15,000.00	18,000.00
Contribution margin (per unit)	112.00	112.00
Contribution margin	1,680,000.00	2,016,000.00
Fixed costs	1,346,000.00	1,346,000.00
Operating income	334,000.00	670,000.00	336,000.00	Operating Income Increase

4.

Phoenix Company
Forecasted Contribution Margin income Statement
For Year Ended December 31,2019
Sales in units	15,000.00	12,000.00
Contribution margin (per unit)	112.00	112.00
Contribution margin	1,680,000.00	1,344,000.00
Fixed costs	1,346,000.00	1,346,000.00
Operating income	334,000.00	-          2,000.00	336,000.00	Operating Income Decrease