Chapter 23, Problem 1BPSB

To determine

Fixed Budget:

A fixed budget is prepared based on one specific projected level of production and it cannot be altered if there is a difference between the projected production and actual production.

Flexible Budget:

Flexible budget is prepared based on the actual level of production. A flexible budget is prepared for different levels of production, so it can be adjusted according to the changes in actual level of production.

To determine:

1. Classification of variable and fixed items in the fixed budget and determine their amounts or their amounts for the year.

2. Preparation of flexible budget at sales volumes of 18,000 and 24,000 units.

3. Calculate the increase in operating income if the sales volume increases to 28,000 units compared to budgeted operating income of $125,000.

4. Computation of operating income (loss) if the sales volume falls to 14,000 units.