Question

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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				$	3,000,000
Cost of goods sold
Direct materials	$	945,000
Direct labor		225,000
Machinery repairs (variable cost)		60,000
Depreciation—Plant equipment (straight-line)		315,000
Utilities ($30,000 is variable)		195,000
Plant management salaries		210,000			1,950,000
Gross profit					1,050,000
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				$	179,000

Problem 21-1A 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.

	PHOENIX COMPANY Fixed Budget Report For Year Ended December 31, 2017 Flexible Budget Flexible Budget for: Variable Amount per Unit Total Fixed Cost Units Sales of 14,000 Unit Sales of 16,000 Variable costs 0.00 0 0 Fixed costs $0 $0 $0

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 $179,000 if this level is reached without increasing capacity?

	PHOENIX COMPANY Forecasted Contribution Margin Income Statement For Year Ended December 31, 2017 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 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.)

	PHOENIX COMPANY Forecasted Contribution Margin Income Statement For Year Ended December 31, 2017 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, 2017
	Flexible Budget			Flexible	Flexible
	Variable Amount		Total	Budget for Unit Sales	Budget for Unit Sales
	per Unit		Fixed	of 14,000	of 16,000
			Cost
Sales	$200.00			$2,800,000	$3,200,000
Variable costs
Direct materials	$63.00			$882,000	$1,008,000
Direct labor	$15.00			$210,000	$240,000
Machinery repairs	$4.00			$56,000	$64,000
Utilities	$2.00			$28,000	$32,000
Packaging	$6.00			$84,000	$96,000
Shipping	$7.00			$98,000	$112,000
Total variable costs	$97.00			1,386,000	$1,552,000
Contribution margin	$103.00			1,442,000	1,648,000
Fixed costs
Depreciation—Plant Equip		$315,000		315,000	315,000
Utilities		165,000		165,000	165,000
Plant mgmt. salaries		210,000		210,000	210,000
Sales salary.		235,000		235,000	235,000
Advertising expense		125,000		125,000	125,000
Salaries		241,000		241,000	241,000
Entertainment expense		75,000		75,000	75,000
Total fixed costs		$1,366,000		1,366,000	1,366,000
Income from operations				$76,000	$282,000

3

PHOENIX COMPANY
Forecasted Contribution Margin Income Statement
For Year Ended December 31, 2017
Sales (in units)	15,000	18,000
Contribution margin (per unit)	103	103
Contribution margin	1545000	1854000
Fixed costs	$1,366,000	$1,366,000
Operating income	$179,000	$488,000	increase	$309,000

4

PHOENIX COMPANY
Forecasted Contribution Margin Income Statement
For Year Ended December 31, 2017
Sales (in units)	15,000	12,000
Contribution margin (per unit)	103	103
Contribution margin	1545000	1236000
Fixed costs	$1,366,000	$1,366,000
Operating income	$179,000	($130,000)	Decrease	($309,000)

Working notes for the answer is as under