
Concept explainers
1.
The items listed in the flexible budget as variable or fixed and their amount per unit or for the year.
1.

Explanation of Solution
The flexible budget for the year ended December 31, 2017.
Fixed cost ($) | |||
Cost | Total | Per unit | |
Variable cost: | |||
Direct materials | 975,000 | 65.00 | |
Direct labor | 225,000 | 15.00 | |
Machinery repairs | 60,000 | 4.00 | |
Utilities | 45,000 | 3.00 | |
Packaging | 75,000 | 5.00 | |
Shipping | 105,000 | 7.00 | |
Fixed cost: | |||
Utilities | 150,000 | ||
Plant manager salaries | 200,000 | ||
300,000 | |||
Sales salary | 250,000 | ||
Advertising expense | 125,000 | ||
Administrative salaries | 241,000 | ||
Entertainment expense | 90,000 |
Thus, the variable costs per unit and in total and the fixed costs in total are as mentioned above.
2.
The flexible budget.
2.

Explanation of Solution
The flexible budget for 14,000 and 16,000 units.
Particulars | Variable cost per unit ($) | Total fixed cost ($) | ||
Production | 14,000 units | 16,000 units | ||
Sales | 2,800,000 | 3,200,000 | ||
Less: Variable costs | ||||
Direct materials | 65.00 | 910,000 | 1,040,000 | |
Direct labor | 15.00 | 210,000 | 240,000 | |
Machinery repairs | 4.00 | 56,000 | 64,000 | |
Utilities | 3.00 | 42,000 | 48,000 | |
Packaging | 5.00 | 70,000 | 80,000 | |
Shipping | 7.00 | 98,000 | 112,000 | |
Total variable cost | 1,386,000 | 1,584,000 | ||
Less: Fixed costs | ||||
Utilities | 150,000 | 150,000 | 150,000 | |
Plant manager salaries | 200,000 | 200,000 | 200,000 | |
Depreciation | 300,000 | 300,000 | 300,000 | |
Sales salary | 250,000 | 250,000 | 250,000 | |
Advertising expense | 125,000 | 125,000 | 125,000 | |
Administrative salaries | 241,000 | 241,000 | 241,000 | |
Entertainment expense | 90,000 | 90,000 | 90,000 | |
Total fixed cost | 1,356,000 | 1,356,000 | 1,356,000 | |
Total | 2,742,000 | 2,940,600 | ||
Budgeted income | 58,000 | 259,400 |
Thus, the budgeted income for the 14,000 units is $58,000 and for 16,000 units is $259,400.
3.
The increase in the operating income.
3.

Explanation of Solution
Given,
The sales volume is of 18,000 units.
The budgeted amount is $159,000.
Compute increase in the operating income.
The formula to calculate the increase is,
Substitute $462,000 for the budgeted income on expected units (refer working note) and $159,000 for the given budgeted income.
The increase in operating income is $303,000.
Working note:
Calculation of the variable cost per unit,
The variable cost per unit is $99.
Calculation of the budgeted income at 18,000 units,
Amount ($) | |
Sales | 3,600,000 |
Less: Variable costs | 1,782,000 |
Less: Fixed costs | 1,356,000 |
Budgeted income | 462,000 |
The budgeted income is $462,000.
Hence, the operating income would increase by $303,000.
4.
The income or loss from operations if the business falls to 12,000 units.
4.

Explanation of Solution
Given,
The sales units are 12,000 units.
Calculation of the budgeted income or loss,
Particulars | Amount ($) |
Sales | 2,400,000 |
Less: Variable costs | 1,188,000 |
Less: Fixed costs | 1,356,000 |
Budgeted income | (144,000) |
Thus, there is an operating loss of $144,000 at the sales level of 12,000 units.
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