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	$	900,000
Direct labor		210,000
Machinery repairs (variable cost)		60,000
Depreciation—Plant equipment (straight-line)		315,000
Utilities ($45,000 is variable)		210,000
Plant management salaries		210,000			1,905,000
Gross profit					1,245,000
Selling expenses
Packaging		90,000
Shipping		90,000
Sales salary (fixed annual amount)		235,000			415,000
General and administrative expenses
Advertising expense		125,000
Salaries		241,000
Entertainment expense		80,000			446,000
Income from operations				$	384,000

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.

	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 Fixed costs

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 $384,000 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 -1 Contribution margin (per unit) Contribution margin Fixed costs Operating income

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)

Please show all parts, thank you!

Answer 1

1

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
Sales	210		2940000	3360000
Variable costs
Direct materials	60		840000	960000
Direct labor	14		196000	224000
Machinery repairs (variable cost)	4		56000	64000
Utilities ($45,000 is variable)	3		42000	48000
Packaging	6		84000	96000
Shipping	6		84000	96000
Total variable cost	93		1302000	1488000
Contribution margin			1638000	1872000
Fixed cost
Utilities ($45,000 is variable)		165,000	165,000	165,000
Plant management salaries		210,000	210,000	210,000
Depreciation—Plant equipment (straight-line)		315,000	315,000	315,000
Sales salary (fixed annual amount)		235,000	235,000	235,000
Advertising expense		125,000	125,000	125,000
Salaries		241,000	241,000	241,000
Entertainment expense		80,000	80,000	80,000
Total Fixed Exp		1,371,000	1,371,000	1,371,000
Income from operations			267,000	501,000

Calculation of the varable cost per unit

	A	B=A/150000
Sales	3150000	210
variable cost
Direct materials	900000	60
Direct labor	210000	14
Machinery repairs (variable cost)	60000	4
Utilities ($45,000 is variable)	45000	3
Packaging	90000	6
Shipping	90000	6
Total variable cost	1395000
Fixed cost
Utilities ($45,000 is variable)	165,000
Plant management salaries	210000
Depreciation—Plant equipment (straight-line)	315000
Sales salary (fixed annual amount)	235000
Advertising expense	125000
Salaries	241000
Entertainment expense	80000
Total Fixed Exp	1,371,000
Income from operations	384,000

__________________________________

2

PHOENIX COMPANY
Forecasted Contribution Margin Income Statement
For Year Ended December 31, 2017
Sales (in units)	15,000	18,000
Contribution margin (per unit)	117	117
Contribution margin	1755000	2106000
Fixed costs	1,371,000	1371000
Operating income	384,000	735,000	351,000	Operating income increase

___________________________________

3

PHOENIX COMPANY
Forecasted Contribution Margin Income Statement
For Year Ended December 31, 2017
Sales (in units)	15,000	12,000
Contribution margin (per unit)	117	117
Contribution margin	1755000	1404000
Fixed costs	1371000	1371000
Operating income (loss)	384000	33000	-351,000	Operating income Decreases