Phoenix Company’s 2017 master budget included the following fixed budget report. It is based on an expected production and sales volume of 15,000 units.
PHOENIX COMPANY
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Fixed Budget Report
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For Year Ended December 31, 2017
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Sales | | \(3,000,000 |
Cost of goods sold | | |
Direct materials | \)975,000 | |
Direct labor | 225,000 | |
Machinery repairs (variable cost) | 60,000 | |
Depreciation-Plant equipment (straight-line) | 300,000 | |
Utilities (\(45,000 is variable) | 195,000 | |
Plant management salaries | 200,000 | 1,955,000 |
Gross profit | | 1,045,000 |
Selling expenses | | |
Packaging | 75,000 | |
Shipping | 105,000 | |
Sales salary (fixed annual amount) | 250,000 | 430,000 |
General and administrative expenses | | |
Advertising expense | 125,000 | |
Salaries | 241,000 | |
Entertainment expense | 90,000 | 456,000 |
Income from operations | | \)159,000 |
Required
1. Classify all items listed in the fixed budget as variable or fixed. Also determine their amounts per unit or their amounts for the year, as appropriate.
2. Prepare flexible budgets (see Exhibit 21.3) for the company at sales volumes of 14,000 and 16,000 units.
3. The company’s business conditions are improving. One possible result is a sales volume of 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 2017 budgeted amount of $159,000 if this level is reached without increasing capacity?
4. An unfavorable change in business is remotely possible; in this case, production and sales volume for 2017 could fall to 12,000 units. How much income (or loss) from operations would occur if sales volume falls to this level?
