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. $3,300,000 PHOENIX COMPANY Fixed Budget Report For Year Ended December 31, 2017 Sales Cost of goods sold Direct materials Direct labor Machinery repairs (variable cost) Depreciation-Plant equipment (straight-line) Utilities ($30,000 is variable) Plant management salaries Gross profit Selling expenses Packaging Shipping Sales salary (fixed annual amount) General and administrative expenses Advertising expense Salaries Entertainment expense Income from operations $ 960,000 210,000 60,000 315,000 180,000 210,000 1,935,000 1,365,000 75,000 105,000 235,000 415,000 125,000 230,000 90,000 445,000 $ 505,000

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 $505,000 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

			Flexible Budget		Flexible budget for:
			Variable	total	unit sales	unit sales
			amount pu	fixed cost	14,000	16,000
Sales			220		3080000	3520000
Variable costs
Direct materials			64		896000	1024000
direct labor			14		196000	224000
machinery repairs			4		56000	64000
utilities			2		28000	32000
packaging			5		70000	80000
shipping			7		98000	112000
total variable costs			96		1344000	1536000
contribution margin			124		1736000	1984000
Fixed costs
Depreciation - plant Equipment				315,000	315,000	315,000
Utilities				150000	150000	150000
plant management salaries				210,000	210,000	210,000
Sales salary				235,000	235,000	235,000
Advertising				125,000	125,000	125,000
Salaries				230,000	230,000	230,000
Entertainment expense				90,000	90,000	90,000
total fixed cost				1,355,000	1,355,000	1,355,000
income from operations					381,000	629,000
	forecasted Contribution margin income statement
Sales(in units)			15,000	18,000
Contribution margin (per unit)			124	124
Contribution margin.			1860000	2232000
Fixed costs			1,355,000	1,355,000
operating income			505,000	877,000	372,000	increase
	forecasted Contribution margin income statement
Sales(in units)			15,000	12,000
Contribution margin (per unit)			124	124
Contribution margin.			1860000	1488000
Fixed costs			1,355,000	1,355,000
operating income			505,000	133,000	-372,000	decrease