Hill Industries had sales in 2016 of $6,880,000 and gross profit of $1,192,000.

Question

Hill Industries had sales in 2016 of $6,880,000 and gross profit of $1,192,000. 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 43,000 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 overhead for 2017 should be $1,995,000.

compute the gross profit under each plan

Explanation / Answer

Plan A Plan B Sales volume in 2016           860,000 10% decrease       774,000.0       881,000.0 Sales    6,501,600.0    6,607,500.0 Closing stock       325,080.0 Direct labor       1,393,200       1,585,800 Direct material       1,083,600       1,233,400 Variable overhead           928,800       1,057,200 Fixed overhead       1,995,000       1,995,000 Gross profit       1,101,000           736,100

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