Question

Exercise 21-3 Preparing flexible budgets LO P1

Tempo Company's fixed budget (based on sales of 10,000 units) for the first quarter reveals the following.

	Fixed Budget
Sales (10,000 units × $211 per unit)						$	2,110,000
Cost of goods sold
Direct materials		$	230,000
Direct labor			440,000
Production supplies			270,000
Plant manager salary			30,000				970,000
Gross profit							1,140,000
Selling expenses
Sales commissions			70,000
Packaging			160,000
Advertising			100,000				330,000
Administrative expenses
Administrative salaries			80,000
Depreciation—office equip.			50,000
Insurance			20,000
Office rent			30,000				180,000
Income from operations						$	630,000

(1) Compute the total variable cost per unit.
(2) Compute the total fixed costs.
(3) Compute the income from operations for sales volume of 8,000 units.
(4) Compute the income from operations for sales volume of 12,000 units.

Answer 1

(1) Total variable cost per unit

Direct materials	$230,000 / 10,000	$23.00	per unit
Direct labor	$440,000 / 10,000	$44.00	per unit
Production supplies	$270,000 / 10,000	$27.00	per unit
Sales commissions	$70,000 / 10,000	$7.00	per unit
Packaging	$160,000 / 10,000	$16.00	per unit
Total variable cost per unit		$117.00	per unit

(2) Total fixed cost

Fixed costs:
Plant manager salary	$30,000
Advertising	$100,000
Administrative salaries	$80,000
Depreciation - Office equipment	$50,000
Insurance	$20,000
Office rent	$30,000
Total fixed cost	$310,000

​​​​​(3) Income from operations for sales volume of 8,000 units

Particulars	Amount
Sales (8,000 *$211)	$1,688,000
Less: Variable expenses (8,000 * $117)	$936,000
Contribution margin	$752,000
Less: Fixed expenses	$310,000
Income from operations	$442,000

(4) Income from operations for sales volume of 12,000 units

Particulars	Amount
Sales (12,000 *$211)	$2,532,000
Less: Variable expenses (12,000 * $117)	$1,404,000
Contribution margin	$1,128,000
Less: Fixed expenses	$442,000
Income from operations	$686,000

*Sales = Selling price * Sales units

*Variable expenses = Variable cost per unit * Sales units

*Fixed expenses remain constant on each level of sales