Chapter 21, Problem 1PSB

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

	Variable cost ($)		Fixed cost ($)
Cost	Total	Per unit
Variable cost:
Direct materials	1,200,000	60.00
Direct labor	260,000	13.00
Machinery repairs	57,000	2.85
Utilities	50,000	2.50
Packaging	80,000	4.00
Shipping	116,000	5.80
Fixed cost:
Utilities			150,000
Plant manager salaries			140,000
Depreciation			250,000
Sales salary			160,000
Advertising expense			81,000
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 18,000 and 24,000 units.

Particulars	Variable cost per unit ($)	Total fixed cost ($)	Flexible budget ($)
Production			18,000 units	24,000 units
Sales			2,700,000	3,600,000
Less: Variable costs
Direct materials	60.00		1,080,000	1,440,000
Direct labor	13.00		234,000	312,000
Machinery repairs	2.85		51,300	68,400
Utilities	2.50		45,000	60,000
Packaging	4.00		72,000	96,000
Shipping	5.80		104,400	139,200
Total variable cost			1,586,700	2,115,600
Less: Fixed costs
Utilities		150,000	150,000	150,000
Plant manager salaries		140,000	140,000	140,000
Depreciation		250,000	250,000	250,000
Sales salary		160,000	160,000	160,000
Advertising expense		81,000	81,000	81,000
Administrative salaries		241,000	241,000	241,000
Entertainment expense		90,000	90,000	90,000
Total fixed cost		1,112,000	1,112,000	1,112,000
Total overheads			2,698,700	3,227,600
Budgeted income			1,300	372,400

Table(2)

Thus, the budgeted income for the 18,000 units is $1,300 and for 24,000 units is $372,400.

3.

To determine

The increase in the operating income.

Explanation of Solution

Given,
The sales volume is of 28,000 units.
The budgeted amount is $125,000.

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 $619,800 for the budgeted income on expected units (refer working note) and $125,000 for the given budgeted income in the above formula.

   $\begin{array}{c}\text{Increase}\text{in}\text{budgeted}\text{income}=\$619,800-\$125,000\\ =\$494,800\end{array}$

The increase in operating income is $494,800.

Working note:

Calculation of the variable cost per unit:

   $\begin{array}{c}\text{Total}\text{variable}\text{cost}\text{per}\text{unit}=\$60+\$13+\$2.85+\$2.50+\$4+\$5.80\\ =\$88.15\end{array}$

The variable cost per unit is $88.15.

Calculation of the budgeted income at 28,000 units,

Particulars	Amount ($)
Sales $\left(28,000\times \$150\right)$	4,200,000
Less: Variable costs $\left(28,000\times \$88.15\right)$	2,468,200
Less: Fixed costs	1,112,000
Budgeted income	619,800

Table(3)

Hence, the operating income would increase by $494,800.

4.

To determine

The income or loss from operations if the business falls to 14,000 units.

Explanation of Solution

Given,
The sales units are 14,000 units.

Calculation of the budgeted income or loss,

Particulars	Amount ($)
Sales $\left(14,000\times \$150\right)$	2,100,000
Less: Variable costs $\left(14,000\times \$88.15\right)$	1,234,100
Less: Fixed costs	1,112,000
Budgeted income	(246,100)

Table(4)

Thus, there is operating loss of $246,100 at the sales level of 14,000 units.