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	$	975,000
Direct labor		225,000
Machinery repairs (variable cost)		60,000
Depreciation—Plant equipment (straight-line)		300,000
Utilities ($45,000 is variable)		195,000
Plant management salaries		200,000			1,955,000
Gross profit					1,045,000
Selling expenses
Packaging		75,000
Shipping		105,000
Sales salary (fixed annual amount)		250,000			430,000
General and administrative expenses
Advertising expense		125,000
Salaries		241,000
Entertainment expense		90,000			456,000
Income from operations				$	159,000

Required:
1.a/b 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 Total Fixed Units Sales Unit Sales of per Unit Cost of 14.000 15.000 s 200.00 $2,800,000 $ 3,200,000 Advertising expense Variable costs Direct materials Direct labor Machinery repairs Utilities Packaging 1 3 62.00 15.00 .00 2.00 5.00 6.00 868,000 210,000 42.000 28.000 70,000 84.000 002,000 240,000 48,000 32.000 80.000 98.000 Shipping 93.00 107.00 1,302,000 1.498,000 1,488,000 1.712,000 ($ Total variable costs Contribution margin Fixed costs Depreciation-Plant equipment (straight-line) | Advertising expense 315,000 125.000 Entertainment expense 85.000 Plant management salaries 315.000 125,000 85.000 200.000 150.000 235,000 230,000 315,000 125.000 85.000 200.000 150.000 235,000 230,000 Utilities 200.000 150.000 235,000 230.000 Sales salary Salaries | $ 1.340.000 Total foced costs Income from operations $1,340,000 $ 158,000 $ $ 1.340,000 372.000

1.c 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 $159,000 if this level is reached without increasing capacity?

1.dAn 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

Solution

PHOENIX COMPANY
Flexible Budget report
For year ended December 31, 2017
	Flexibla budget		Flexible budget for
	variable Amount per Unit	Total Fixed cost		14000 units	16000 units
Sales	$ 200			$ 2,800,000	$ 3,200,000
Variable costs
Direct material	$ 65			$ 910,000	$ 1,040,000
Direct Labor	$ 15			$ 210,000	$ 240,000
Machinery repairs	$ 4			$ 56,000	$ 64,000
Utilities	$ 3			$ 42,000	$ 48,000
Packaging	$ 5			$ 70,000	$ 80,000
Shipping	$ 7			$ 98,000	$ 112,000
Total Variable Coists	$ 99			$ 1,386,000	$ 1,584,000
Contribution margin	$ 101			$ 1,414,000	$ 1,616,000
Fixed costs
Depreciation- Plant equipment		$ 300,000		$ 300,000	$ 300,000
Utilities		$ 150,000		$ 150,000	$ 150,000
Plant management salaries		$ 200,000		$ 200,000	$ 200,000
Sales salaries		$ 250,000		$ 250,000	$ 250,000
Advertising expenses		$ 125,000		$ 125,000	$ 125,000
Salaries		$ 241,000		$ 241,000	$ 241,000
Entertainment expenses		$ 90,000		$ 90,000	$ 90,000
Total Fixed costs		$ 1,356,000		$ 1,356,000	$ 1,356,000
Income from Operations				$ 58,000	$ 260,000

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PHOENIX COMPANY
Forcasted Contribution margin Income Statement
For the year ended December 31, 2017
Sales(in units)	15000	18000
Contribution margin per unit	$              101.00	$              101.00
Contribution margin	$ 1,515,000.00	$ 1,818,000.00
Fixed cost	$ 1,356,000.00	$ 1,356,000.00
Operating income	$      159,000.00	$      462,000.00	$ 303,000	Operating income increase

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.

PHOENIX COMPANY
Forcasted Contribution margin Income Statement
For the year ended December 31, 2017
Sales(in units)	15000	12000
Contribution margin per unit	$              101.00	$              101.00
Contribution margin	$ 1,515,000.00	$ 1,212,000.00
Fixed cost	$ 1,356,000.00	$ 1,356,000.00
Operating income	$      159,000.00	$    (144,000.00)