[The following information applies to the questions displayed below.] Prepare fl

Question

[The following information applies to the questions displayed below.]

Prepare flexible budgets for the company at sales volumes of 14,000 and 16,000 units and classify all items listed in the fixed budget as variable or fixed.

The company’s business conditions are improving. One possible result is a sales volume of approximately 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 2013 budgeted amount of $469,000 if this level is reached without increasing capacity?

An unfavorable change in business is remotely possible; in this case, production and sales volume for 2013 could fall to 12,000 units. How much income (or loss) from operations would occur if sales volume falls to this level? (Loss should be indicated by minus sign.)

Phoenix Company’s 2013 master budget included the following fixed budget report. It is based on an expected production and sales volume of 15,000 units.

Explanation / Answer

Now we will prepare Flexible Budget Report For 14000 and 16000 units

As under

The company’s business conditions are improving. One possible result is a sales volume of approximately 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 2013 budgeted amount of $469,000 if this level is reached without increasing capacity?

Answer : Increase in the profit by $ 375000

Working notes for the above answer is as under

An unfavorable change in business is remotely possible; in this case, production and sales volume for 2013 could fall to 12,000 units. How much income (or loss) from operations would occur if sales volume falls to this level

Answer

Decrease in Profit $(375,000)

Working notes for the above answer

Variable or Fixed Classification Particular Amount in $ Variable sales
(total divided by 15,000 units) Sales. 220 Less: Variable costs (total divided by 15,000 units) Direct materials 62 Direct labor 15 Machinery repairs 3 Utilities ($30,000 variable). 2 Packaging 6 Shipping 7 Total variable costs 95 Fixed costs Depreciation—Plant equipment 330000 Utilities ($210,000 - $30,000 variable) 180000 Plant management salaries 210000 Sales salary 235000 Advertising expense 125000 Salaries 241000 Entertainment expense 85000 Total fixed costs 1406000

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