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				$	3,150,000
Cost of goods sold
Direct materials	$	960,000
Direct labor		225,000
Machinery repairs (variable cost)		45,000
Depreciation—Plant equipment (straight-line)		315,000
Utilities ($45,000 is variable)		195,000
Plant management salaries		190,000			1,930,000
Gross profit					1,220,000
Selling expenses
Packaging		75,000
Shipping		105,000
Sales salary (fixed annual amount)		235,000			415,000
General and administrative expenses
Advertising expense		150,000
Salaries		241,000
Entertainment expense		90,000			481,000
Income from operations				$	324,000

a,  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.

.b. 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 $299,000 if this level is reached without increasing

c. 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

Amswer A

Flexible budgets for the company at sales volumes of 14,000 and 16,000 units and classification of all items listed in the fixed budget as variable or fixed.
PHOENIX COMPANY
Fixed Budget Report	Original Budget	Classification	Per Unit Cost	Budget at 14000 units	Budget at 16000 units
For Year Ended December 31, 2017				15000	14000		16000
Sales		31,50,000	Variable	210		2940000		3360000
Cost of goods sold
Direct materials	9,60,000		Variable	64	896000		1024000
Direct labor	2,25,000		Variable	15	210000		240000
Machinery repairs (variable cost)	45,000		Variable	3	42000		48000
Depreciation—Plant equipment (straight-line)	3,15,000		Variable	21	294000		336000
Utilities ($45,000 is variable)	45,000		Variable	3	42000		48000
Utilities ($150,000 is Fixed)	1,50,000		Fixed	0	1,50,000		1,50,000
Plant management salaries	1,90,000	19,30,000	Fixed		1,90,000	18,24,000	1,90,000	20,36,000
Gross profit		12,20,000				11,16,000		13,24,000
Selling expenses
Packaging	75,000		Variable	5	70000
Shipping	1,05,000		Variable	7	98000
Sales salary (fixed annual amount)	2,35,000	4,15,000	Fixed		2,35,000	4,03,000	2,35,000	2,35,000
General and administrative expenses
Advertising expense	1,50,000		Fixed		1,50,000		1,50,000
Salaries	2,41,000		Fixed		2,41,000		2,41,000
Entertainment expense	90,000	4,81,000	Fixed		90,000	4,81,000	90,000	4,81,000
Income from operations		3,24,000				2,32,000		6,08,000

Answer B

PHOENIX COMPANY
Fixed Budget Report	Budget at 18000 units
For Year Ended December 31, 2017	18,000
Sales		37,80,000
Cost of goods sold
Direct materials	11,52,000
Direct labor	2,70,000
Machinery repairs (variable cost)	54,000
Depreciation—Plant equipment (straight-line)	3,78,000
Utilities ($45,000 is variable)	54,000
Utilities ($150,000 is Fixed)	1,50,000
Plant management salaries	1,90,000	22,48,000
Gross profit		15,32,000
Selling expenses
Packaging
Shipping
Sales salary (fixed annual amount)	2,35,000	2,35,000
General and administrative expenses
Advertising expense	1,50,000
Salaries	2,41,000
Entertainment expense	90,000	4,81,000
Income from operations		8,16,000

Answer C

Fixed Budget Report	Budget at 12000 units
For Year Ended December 31, 2017	12,000
Sales		25,20,000
Cost of goods sold
Direct materials	7,68,000
Direct labor	1,80,000
Machinery repairs (variable cost)	36,000
Depreciation—Plant equipment (straight-line)	2,52,000
Utilities ($45,000 is variable)	36,000
Utilities ($150,000 is Fixed)	1,50,000
Plant management salaries	1,90,000	16,12,000
Gross profit		9,08,000
Selling expenses
Packaging
Shipping
Sales salary (fixed annual amount)	2,35,000	2,35,000
General and administrative expenses
Advertising expense	1,50,000
Salaries	2,41,000
Entertainment expense	90,000	4,81,000
Income from operations		1,92,000