Question

The management of Franklin Modems, Inc. (FMI) is uncertain as to the volume of sales that will exist in Year 1. The president of the company asked the chief accountant to prepare flexible budget income statements assuming that sales activity amounts to 5,000 and 7,000 units. The static budget is shown in the following form.

Required

1. Complete the following worksheet to prepare the appropriate flexible budgets.

2. Calculate and show the flexible budget variances for the static budget versus the flexible budget at 7,000 units.

3. Indicate whether each variance is favorable (F) or unfavorable (U). (Select "None" if there is no effect (i.e., zero variance).)

   FRANKLIN MODEMS, INC. Flexible Budget Income Statements Cost per unit Static Budget Flexible Budgets Volume Variance Number of units 6,000 5,000 7,000 Sales revenue $120 $720,000 Variable manufacturing costs: Materials 40 240,000 Labor 25 150,000 Overhead 5 30,000 Variable selling, general & administrative 7 42,000 Contribution margin 258,000 Fixed costs: Manufacturing rent 57,000 Depreciation on manufacturing equipment 67,000 Selling, general & administrative expenses 82,800 Depreciation on administrative equipment 19,000 Net income (loss) $32,200 $(10,800) $75,200

Answer 1

		Budget amount per unit	Master Budget	Flexible Budget		Volume Variance
	Units	(q)	6,000	5,000	7,000
	Sales Revenue	$           120	$   7,20,000	$   6,00,000	$   8,40,000	$   1,20,000	F
Less:	Variable Manufacturing costs:
	Material	$             40	$   2,40,000	$   2,00,000	$   2,80,000	$       40,000	U
	Labor	$             25	$   1,50,000	$   1,25,000	$   1,75,000	$       25,000	U
	Manufacturing overheads	$               5	$       30,000	$      25,000	$      35,000	$         5,000	U
	Variable selling general and administrative cost	$               7	$       42,000	$      35,000	$      49,000	$         7,000	U
	Contribution margin		$   2,58,000	$   2,15,000	$   3,01,000	$       43,000	F
Less:	Fixed Expenses
	Manufacturing rents		$       57,000	$      57,000	$      57,000	$                -	None
	Depreciation on manufacturing equipment		$       67,000	$      67,000	$      67,000	$                -	None
	Selling general and administrative cost		$       82,800	$      82,800	$      82,800	$                -	None
	Depreciation on administrative equipment		$       19,000	$      19,000	$      19,000	$                -	None
	Net Income (loss)		$       32,200	$     -10,800	$      75,200	$       43,000	F