Pr P9-3A Hill Industries had sales in 2016 of $6,800,000 and gross profit of $1,

Question

Pr P9-3A Hill Industries had sales in 2016 of $6,800,000 and gross profit of $1,100,000. Par a in 2017. Management is considering two alternative budget plans to increase its gross pr sales and budgets and com unit under two pi profit he Plan A would increase the selling price per unit from $8.00 to $8.40. Sales volume (LO2),E would decrease by 10% from its 2016 level. Plan Bu ould decrease the selling price per unit by S0.50. The marketing department expects that the sales volume would increase by 100,000 units. Der At the end of 2016, Hill has 40,000 units of inventory on hand, If Plan A is accepted the 2017 ending inventory should be equal to 5% of the 2017 sales. If Plan B is accepted. the ending inventory should be equal to 60,000 units. Each unit produced will cost $1.80 in direct labor, $1.40 in direct materials, and $1.20 in variable overhead. The fixed over head for 2017 should be $1,895,000. Instructions (a) Prepare a sales budget for 2017 under each plan. (b) Prepare a production budget for 2017 under each plan. (c) Compute the production cost per unit under each plan. Why is the cost per unit different (c) Unit cost: Plan A ur. per Plan B $6.35 (d) Gross profit Plan A $1,162,8 for each of the two plans? (Round to two decimals.) (d) Which plan should be accepted? (Hint: Compute the gross profit under each plan.)Plan 8 $1.095 get

Explanation / Answer

Current sales interms of Units = 6800,000 / 8 = 850,000

Under Plan - A .......... it will be 850,000 * ( 1 - 0.10) = 765000 Units

Under Plan - B ......... it will be 850,000 + 100,000 = 950,000 Units

For Production budget, sales (units) as per above budget shall taken, for that add the desired ending inventory and deduct available beginning inventory. Note that beginning inventory remains same either plans.

(c)  

Difference in Unit cost is mainly due to Fixed cost per Unit which decreases with increase in production volume. As total fixed cost remains same at any production volume, we experience a decrease in unit cost due increase in production.

(d) Plan - A should be accepted as overall gross profit ( in total dollar terms) is highest in this plan

(a) Sales budget for 2017 Plan - A Plan - B Units sold 765000 950000 selling price per Unit 8.4 7.5 Sales ( dollars) 6426000 7125000

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