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				$	3,300,000
Cost of goods sold
Direct materials	$	945,000
Direct labor		240,000
Machinery repairs (variable cost)		45,000
Depreciation—Plant equipment (straight-line)		300,000
Utilities ($60,000 is variable)		195,000
Plant management salaries		210,000			1,935,000
Gross profit					1,365,000
Selling expenses
Packaging		90,000
Shipping		105,000
Sales salary (fixed annual amount)		235,000			430,000
General and administrative expenses
Advertising expense		150,000
Salaries		230,000
Entertainment expense		80,000			460,000
Income from operations				$	475,000

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.

Answer 1

			Variable amount/unit	Total fixed cost
Units	15000					14000	16000
Sales	33,00,000		220			3080000	3520000
Variable costs
Direct materials	9,45,000		63			882000	1008000
Direct labor	2,40,000		16			224000	256000
Machinery repairs (variable cost)	45,000		3			42000	48000
Utilities ($60,000 is variable)	60,000		4			56000	64000
Packaging	90,000		6			84000	96000
Shipping	1,05,000		7			98000	112000
Total variable cost	14,85,000		99			1386000	1584000
Margin	18,15,000		121			1694000	1936000
Fixed costs
Depreciation—Plant equipment (straight-line)	3,00,000			3,00,000		300000	300000
Utilites (195000-60000)	1,35,000			1,35,000		135000	135000
Plant management salaries	2,10,000			2,10,000		210000	210000
Sales salary (fixed annual amount)	2,35,000			2,35,000		235000	235000
Advertising expense	1,50,000			1,50,000		150000	150000
Salaries	2,30,000			2,30,000		230000	230000
Entertainment expense	80,000			80,000		80000	80000
Total fixed cost	13,40,000			13,40,000		13,40,000	13,40,000
Income from operations	4,75,000					3,54,000	5,96,000

Explanation:

Variable sales

Sales: $3,300,000 / 15,000 units = $220.00

Variable costs

Direct materials: $945,000 / 15,000 units = $63

Direct labor: $240,000 / 15,000 units = $16

Machinery repairs: $45,000 / 15,000 units = $3

Utilities: $60,000 / 15,000 units = $4

Packaging: $90,000 / 15,000 units = $6

Shipping: $105,000 / 15,000 units = $7

Fixed costs

Utilities ($195,000 – $60,000 is variable) = $135,000