Question

Problem 22-03A a-b, c1, d Hill Industries had sales in 2019 of $7,520,000 and gross profit of $1,128,000. Management is considering two alternative budget plans to increase its gross profit in 2020. Plan A would increase the selling price per unit from $8.00 to $8.40. Sales volume would decrease by 10% from its 2019 level. Plan B would decrease the selling price per unit by $0.50. The marketing department expects that the sales volume would increase by 101,000 units. At the end of 2019, Hill has 44,000 units of inventory on hand. If Plan A is accepted, the 2020 ending inventory should be equal to 5% of the 2020 sales. If Plan B is accepted, the ending inventory should be equal to 72,000 units. Each unit produced will cost $1.80 in direct labor, $1.40 in direct materials, and $1.20 in variable overhead. The fixed overhead for 2020 should be $1,941,890.

Prepare a sales budget for 2020 under each plan. (Round Unit selling price answers to 2 decimal places, e.g. 52.70.) HILL INDUSTRIES Sales Budget For the Year Ending December 31, 2020December 31, 2020For the Quarter Ending December 31, 2020 Plan A Plan B Direct LaborDirect MaterialsExpected Unit SalesProduction UnitsTotal SalesUnit Selling Price Direct LaborDirect MaterialsExpected Unit SalesProduction UnitsTotal SalesUnit Selling Price $ $ Direct LaborDirect MaterialsExpected Unit SalesProduction UnitsTotal SalesUnit Selling Price $ $

Prepare a production budget for 2020 under each plan. HILL INDUSTRIES Production Budget For the Quarter Ending December 31, 2020For the Year Ending December 31, 2020December 31, 2020 Plan A Plan B Required Production UnitsDesired Ending Finished Goods UnitsTotal Materials RequiredTotal Pounds Needed for ProductionTotal Required UnitsDirect Materials PurchasesDesired Ending Direct MaterialsBeginning Direct MaterialsDirect Materials per UnitExpected Unit SalesBeginning Finished Goods Units AddLess : Beginning Direct MaterialsTotal Pounds Needed for ProductionBeginning Finished Goods UnitsDesired Ending Finished Goods UnitsExpected Unit SalesRequired Production UnitsDesired Ending Direct MaterialsDirect Materials per UnitDirect Materials PurchasesTotal Materials RequiredTotal Required Units Total Pounds Needed for ProductionExpected Unit SalesRequired Production UnitsTotal Materials RequiredTotal Required UnitsBeginning Direct MaterialsDirect Materials per UnitBeginning Finished Goods UnitsDesired Ending Direct MaterialsDesired Ending Finished Goods UnitsDirect Materials Purchases AddLess : Direct Materials per UnitTotal Pounds Needed for ProductionTotal Required UnitsBeginning Direct MaterialsDesired Ending Finished Goods UnitsDirect Materials PurchasesBeginning Finished Goods UnitsDesired Ending Direct MaterialsTotal Materials RequiredExpected Unit SalesRequired Production Units Direct Materials PurchasesTotal Pounds Needed for ProductionTotal Required UnitsBeginning Direct MaterialsTotal Materials RequiredDesired Ending Finished Goods UnitsBeginning Finished Goods UnitsExpected Unit SalesDesired Ending Direct MaterialsDirect Materials per UnitRequired Production Units

Compute the production cost per unit under each plan. (Round answers to 2 decimal places, e.g. 1.25.) Plan A Plan B Production cost per unit $ $

Compute the gross profit under each plan. Plan A Plan B Gross Profit $ $ Which plan should be accepted? Plan APlan B should be accepted.

Answer 1

a)

HILL INDUSTRIES Sales Budget For the Year Ending December 31, 2020
		Plan A		Plan B
Expected Unit Sales		846,000		1,041,000
Unit Selling Price		$8.40		$7.50
Total Sales		$7,106,400		$7,807,500

Unit sales in 2019= $7,520,000/8.00= 940,000 units

Plan A unit sales in 2020= 940,000*0.9= 846,000 units

Plan B unit sales in 2020= 940,000+101,000= 1,041,000 units

Sales price of Plan B= $8.00-0.50= $7.50 per unit

b)

HILL INDUSTRIES Production Budget For the Year Ending December 31, 2020
		Plan A		Plan B
Expected Unit Sales		846,000		1,041,000
Add: Desired Ending Finished Goods Units		42,300		72,000
Total Required Units		888,300		1,113,000
Less: Beginning Finished Goods Units		-44,000		-44,000
Required Production Units		844,300		1,069,000

Calculation of Desired Ending Finished Goods Units

Plan A= 846,000*5%= 42,300 units

c) Calculation of Production cost per unit

	Plan A	Plan B
Direct labor	$1.80	$1.80
Direct materials	1.40	1.40
Variable overhead	1.20	1.20
Fixed overhead	(1,941,890/844,300)= 2.30	(1,941,890/1,069,000)= 1.82
Production cost per unit	$6.70	$6.22

	Plan A	Plan B
Production cost per unit	$6.70	$6.22

d) Calculation of Gross profit

	Plan A	Plan B
Total sales	$7,106,400	$7,807,500
Less: Production cost	($6.70*846,000)= 5,668,200	($6.22*1,041,000)= 6,475,020
Gross profit	$1,438,200	$1,332,480

	Plan A	Plan B
Gross profit	$1,438,200	$1,332,480

Plan A should be accepted as the gross profit under Plan A is more than Plan B.

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