Hill Industries had sales in 2016 of $ 7,600,000 and gross profit of $ 1,199,000
ID: 2446343 • Letter: H
Question
Hill Industries had sales in 2016 of $ 7,600,000 and gross profit of $ 1,199,000 . Management is considering two alternative budget plans to increase its gross profit in 2017.
Plan A would increase the selling price per unit from $ 8.00 to $ 8.40 . Sales volume would decrease by 10% from its 2016 level. Plan B would decrease the selling price per unit by $ 0.50 . The marketing department expects that the sales volume would increase by 107,000 units.
At the end of 2016, Hill has 48,000 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 64,000 units. Each unit produced will cost $ 1.80 in direct labor, $ 1.40 in direct materials, and $ 1.20 in variable overhead. The fixed overhead for 2017 should be $ 1,762,000 .
(a)
Plan A
Plan B
Prepare a production budget for 2014 under each plan.
MARSH INDUSTRIES
Production Budget
For the Year Ending December 31, 2014
Plan A
Plan B
Compute the production cost per unit under each plan.
Calculate the gross profit for each plan.
Gross profit
Which plan should be accepted?
Hill Industries had sales in 2016 of $ 7,600,000 and gross profit of $ 1,199,000 . Management is considering two alternative budget plans to increase its gross profit in 2017.
Plan A would increase the selling price per unit from $ 8.00 to $ 8.40 . Sales volume would decrease by 10% from its 2016 level. Plan B would decrease the selling price per unit by $ 0.50 . The marketing department expects that the sales volume would increase by 107,000 units.
At the end of 2016, Hill has 48,000 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 64,000 units. Each unit produced will cost $ 1.80 in direct labor, $ 1.40 in direct materials, and $ 1.20 in variable overhead. The fixed overhead for 2017 should be $ 1,762,000 .
Explanation / Answer
(a)
Sales budget for 2017 under each plan.
HILL INDUSTRIES
Sales Budget
For the Year Ending December 31, 2017
Plan A
Plan B
Expected unit sales (A)
855000
1057000
(7600000/8)*(1-10%)
(7600000/8)+107000
Unit selling price (B)
$ 8.40
$ 7.50
(8-0.50)
Total sales (A*B)
$ 7,182,000
$ 7,927,500
(b)
Prepare a production budget for 2014 under each plan.
HILL INDUSTRIES
Production Budget
For the Year Ending December 31, 2014
Plan A
Plan B
Expected Unit Sales
855000
1057000
Add: Desired Ending Finished Goods Units
42750
64000
(855000*5%)
Total Required Units
897750
1121000
Less: Beginning Finished Goods Units
-48000
-48000
Required Production Units
849750
1073000
(c)
Calculation of the production cost per unit under each plan.
Plan A
Plan B
Direct Material Cost per unit
$ 1.40
$ 1.40
Add: Direct Labor Cost per unit
$ 1.80
$ 1.80
Add: Variable overhead cost per unit
$ 1.20
$ 1.20
Add: Fixed overhead cost per unit
$ 2.07
$ 1.64
(1762000/849750)
(1762000/1073000)
Production cost per unit
$ 6.47
$ 6.04
(d)
Calculation of the gross profit for each plan:
Plan A
Plan B
Total Sales
$ 7,182,000
$ 7,927,500
Less: Cost of Goods sold
$ (5,531,850)
$ (6,384,280)
(Sales units * Production Cost per unit)
(855000*6.47)
(1057000*6.04)
Gross Profit
$ 1,650,150
$ 1,543,220
(e)
Which plan should be accepted?
The gross profit is higher in plan A, hence plan A should be accepted.
(a)
Sales budget for 2017 under each plan.
HILL INDUSTRIES
Sales Budget
For the Year Ending December 31, 2017
Plan A
Plan B
Expected unit sales (A)
855000
1057000
(7600000/8)*(1-10%)
(7600000/8)+107000
Unit selling price (B)
$ 8.40
$ 7.50
(8-0.50)
Total sales (A*B)
$ 7,182,000
$ 7,927,500
(b)
Prepare a production budget for 2014 under each plan.
HILL INDUSTRIES
Production Budget
For the Year Ending December 31, 2014
Plan A
Plan B
Expected Unit Sales
855000
1057000
Add: Desired Ending Finished Goods Units
42750
64000
(855000*5%)
Total Required Units
897750
1121000
Less: Beginning Finished Goods Units
-48000
-48000
Required Production Units
849750
1073000
(c)
Calculation of the production cost per unit under each plan.
Plan A
Plan B
Direct Material Cost per unit
$ 1.40
$ 1.40
Add: Direct Labor Cost per unit
$ 1.80
$ 1.80
Add: Variable overhead cost per unit
$ 1.20
$ 1.20
Add: Fixed overhead cost per unit
$ 2.07
$ 1.64
(1762000/849750)
(1762000/1073000)
Production cost per unit
$ 6.47
$ 6.04
(d)
Calculation of the gross profit for each plan:
Plan A
Plan B
Total Sales
$ 7,182,000
$ 7,927,500
Less: Cost of Goods sold
$ (5,531,850)
$ (6,384,280)
(Sales units * Production Cost per unit)
(855000*6.47)
(1057000*6.04)
Gross Profit
$ 1,650,150
$ 1,543,220
(e)
Which plan should be accepted?
The gross profit is higher in plan A, hence plan A should be accepted.
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