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				$	3,300,000
Cost of goods sold
Direct materials	$	945,000
Direct labor		225,000
Machinery repairs (variable cost)		45,000
Depreciation—Plant equipment (straight-line)		300,000
Utilities ($30,000 is variable)		195,000
Plant management salaries		200,000			1,910,000
Gross profit					1,390,000
Selling expenses
Packaging		90,000
Shipping		90,000
Sales salary (fixed annual amount)		235,000			415,000
General and administrative expenses
Advertising expense		100,000
Salaries		230,000
Entertainment expense		75,000			405,000
Income from operations				$	570,000

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.

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 $570,000 if this level is reached without increasing capacity?

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.)

Answer 1

1&2. Flexible Budgets:

	Type	14,000 units	16,000 units
Sales	Variable	3,080,000	3,520,000
Cost of Goods Sold
Direct Material	Variable	882,000	1,008,000
Direct Labor	Variable	210,000	240,000
Machinery repairs	Variable	42,000	48,000
Depreciation—Plant equipment (straight-line)	Fixed	300,000	300,000
Utilities	Mixed	193,000	197,000
Plant management salaries	Fixed	200,000	200,000
Gross Profit		1,253,000	1,527,000
Selling expenses
Packaging	Variable	84,000	96,000
Shipping	Variable	84,000	96,000
Sales salary (fixed annual amount)	Fixed	235,000	235,000
General and administrative expenses
Advertising expense	Fixed	100,000	100,000
Salaries	Fixed	230,000	230,000
Entertainment expense	Fixed	75,000	75,000
Income from Operations		445,000	695,000

3.At 18,000 units:

	Type	18,000 units
Sales	Variable	3,960,000
Cost of Goods Sold
Direct Material	Variable	1,134,000
Direct Labor	Variable	270,000
Machinery repairs	Variable	54,000
Depreciation—Plant equipment (straight-line)	Fixed	300,000
Utilities	Mixed	201,000
Plant management salaries	Fixed	200,000
Gross Profit		1,801,000
Selling expenses
Packaging	Variable	108,000
Shipping	Variable	108,000
Sales salary (fixed annual amount)	Fixed	235,000
General and administrative expenses
Advertising expense	Fixed	100,000
Salaries	Fixed	230,000
Entertainment expense	Fixed	75,000
Income from Operations		945,000

Increase in Income = $945,000-570,000 = $375,000

4.At 12,000 units:

	Type	18,000 units
Sales	Variable	2,640,000
Cost of Goods Sold
Direct Material	Variable	756,000
Direct Labor	Variable	180,000
Machinery repairs	Variable	36,000
Depreciation—Plant equipment (straight-line)	Fixed	300,000
Utilities	Mixed	189,000
Plant management salaries	Fixed	200,000
Gross Profit		979,000
Selling expenses
Packaging	Variable	72,000
Shipping	Variable	72,000
Sales salary (fixed annual amount)	Fixed	235,000
General and administrative expenses
Advertising expense	Fixed	100,000
Salaries	Fixed	230,000
Entertainment expense	Fixed	75,000
Income from Operations		195,000

Hence, income from operations will fall to = $195,000