Question

Phoenix Company’s 2015 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, 2015
Sales: $3,000,000
Cost of goods sold                 
Direct materials: $975,000             
Direct labor: $240,000             
Machinery repairs (variable cost): $45,000             
Depreciation—plant equipment (straight-line): $315,000             
Utilities ($60,000 is variable): $195,000             
Plant management salaries: $200,000 $1,970,000
   Gross profit $1,030,000
Selling expenses                 
Packaging $90,000             
Shipping $105,000             
Sales salary (fixed annual amount) $235,000 $430,000   
         
General and administrative expenses                 
Advertising expense $100,000             
Salaries $230,000             
Entertainment expense $90,000 $420,000
  
   
Income from operations $180,000
           

a. 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.

FIXED BUDGET REPORT FOR YEAR ENDED DECEMBER 2015

	VARIABLE AMOUNT PER UNIT	TOTAL FIXED COST	UNIT SALES OF 14,000	UNIT SALES OF 16,000
SALES
VARIABLE COSTS
-DIRECT MATERIALS
-DIRECT LABOR
-MACHINERY REPAIRS
-UTILITIES
-PACKAGING
-SHIPPING
	$
-CONTRIBUTION MARGIN
FIXED COSTS
-DEPRECIATION (PLANT EQUIPMENT) (STRAIGHT LINE)
UTILITIES
PLANT MANAGEMENT SALARIES
SALES SALARY
ADVERTISING EXPENSE
SALARIES
ENTERTAINMENT EXPENSE

INCOME FROM OPERATIONS:

b. The company’s business conditions are improving. One possible result is a sales volume of approximately 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 2015 budgeted amount of $180,000 if this level is reached without increasing capacity?

FORECASTED MARGIN INCOME STATEMENT FOR YEAR ENDED DECEMBER 31,2015

SALES (IN UNITS)	15,000	18,000
CONTRIBUTION MARGIN (PER UNIT)
CONTRIBUTION MARGIN
FIXED COSTS
EXPECTED INCREASE IN OPERATING INCOME

c.  An unfavorable change in business is remotely possible; in this case, production and sales volume for 2015 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.)

FORECASTED CONTRIBUTION MARGIN INCOME STATEMENT FOR YEAR ENDED DECEMBER 31, 2015

SALES (IN UNITS)	15,000	12,000
CONTRIBUTION MARGIN PER UNIT
CONTRIBUTION MARGIN
FIXED COSTS
OPERATING INCOME (LOSS)

Answer 1

	PHOENIX COMPANY
	Fixed Budget Report
	For Year Ended December 31, 2015
	Flexible Budget		Flexible Budget for:
	Variable Amount per Unit	Total Fixed Cost	Units Sales of 14,000	Unit Sales of 16,000
Sales	200		2800000	3200000
Variable costs:
Direct materials	65		910000	1040000
Direct labor	16		224000	256000
Machinery repairs	3		42000	48000
Utilities	4		56000	64000
Packaging	6		84000	96000
Shipping	7		98000	112000
Total variable costs	101		1414000	1616000
Contribution margin	99		1386000	1584000
Fixed costs
Depreciation—Plant equipment (straight-line)		315000	315000	315000
Utilities		135000	135000	135000
Plant management salaries		200000	200000	200000
Sales salary		235000	235000	235000
Advertising expense		100000	100000	100000
Salaries		230000	230000	230000
Entertainment expense		90000	90000	90000
Total fixed costs		1305000	1305000	1305000
Income from operations			81000	279000
b
Forecasted Contribution Margin Income Statement
For Year ended December 31,2015
Sales (in units)	15000	18000
Contribution margin (per unit)	99	99
Contribution margin	1485000	1782000
Fixed costs	1305000	1305000
Operating income	180000	477000	297000	Operating income increase
c
Forecasted Contribution Margin Income Statement
For Year ended December 31,2015
Sales (in units)	15000	12000
Contribution margin (per unit)	99	99
Contribution margin	1485000	1188000
Fixed costs	1305000	1305000
Operating income(loss)	180000	-117000