Chapter 21, Problem 1PSA

1.

To determine

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

Explanation of Solution

The flexible budget for the year ended December 31, 2017.

	Variable cost ($)		Fixed cost ($)
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
Depreciation			300,000
Sales salary			250,000
Advertising expense			125,000
Administrative salaries			241,000
Entertainment expense			90,000

Table(1)

Thus, the variable costs per unit and in total and the fixed costs in total are as mentioned above.

2.

To determine

The flexible budget.

Explanation of Solution

The flexible budget for 14,000 and 16,000 units.

Particulars	Variable cost per unit ($)	Total fixed cost ($)	Flexible budget ($)
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 overheads			2,742,000	2,940,600
Budgeted income			58,000	259,400

Table(2)

Thus, the budgeted income for the 14,000 units is $58,000 and for 16,000 units is $259,400.

3.

To determine

The increase in the operating income.

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,

   $\text{Increase}\text{in}\text{budgeted}\text{income}=\left(\begin{array}{c}\text{Budgeted}\text{income}\text{on}\text{expected}\text{units}\\ -\text{Given}\text{budgeted}\text{income}\end{array}\right)$

Substitute $462,000 for the budgeted income on expected units (refer working note) and $159,000 for the given budgeted income.

   $\begin{array}{c}\text{Increase}\text{in}\text{budgeted}\text{income}=\$462,000-\$159,000\\ =\$303,000\end{array}$

The increase in operating income is $303,000.

Working note:

Calculation of the variable cost per unit,

   $\begin{array}{c}\text{Total}\text{variable}\text{cost}\text{per}\text{unit}=\left(\begin{array}{l}\$65+\$15+\$4\\ +\$3+\$5+\$7\end{array}\right)\\ =\$99\end{array}$

The variable cost per unit is $99.

Calculation of the budgeted income at 18,000 units,

Particulars	Amount ($)
Sales $\left(18,000\times \$200\right)$	3,600,000
Less: Variable costs $\left(18,000\times \$99\right)$	1,782,000
Less: Fixed costs	1,356,000
Budgeted income	462,000

Table(3)

The budgeted income is $462,000.

Hence, the operating income would increase by $303,000.

4.

To determine

The income or loss from operations if the business falls to 12,000 units.

Explanation of Solution

Given,
The sales units are 12,000 units.

Calculation of the budgeted income or loss,

Particulars	Amount ($)
Sales $\left(12,000\times \$200\right)$	2,400,000
Less: Variable costs $\left(12,000\times \$99\right)$	1,188,000
Less: Fixed costs	1,356,000
Budgeted income	(144,000)

Table(4)

Thus, there is an operating loss of $144,000 at the sales level of 12,000 units.