(SO 2) Prepare sales and pro- two alternative budget plans to increase its gross
ID: 2543174 • Letter: #
Question
(SO 2) Prepare sales and pro- two alternative budget plans to increase its gross profit in 2016 duction budgets and calculate the cost per unit under two plans. P10-36A Colt Industries had sales in 2015 of $5.6 million and gross profit of $1.1 million. Management is considering Plan A would increase the selling price per unit fro m $8.00 to $3.40. Sales volume would decrease by 10% from its 2015 level. Plan B would decrease the selling price per unit by $0.50. The marketing department expects that the sales volume would increase by 100,000 units. At the end of 2015, Colt has 38,000 units of inventory on hand. If Plan A is accepted, the 2016 ending inventory should be equal to 5% of the 2016 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 labour, $1.30 in direct materials, and $1.20 in variable overhead. The fixed overhead for 2016 should be $1,895,000. Instructions Unit cost: Plan A(a) Prepare a sales budget for 2016 under each plan. (c) 34; Plan B $6.60 (b) Prepare a production budget for 2016 under each plan. (c) Calculate the production cost per unit under each plan. Why is the cost per unit different for each of the two plans? (d) which plan should be accepted? (Hint: Calculate the gross profit under each plan.) (d) Gross profit: (Round to two decimals.) Plan AmExplanation / Answer
REQ1: SALES BUDGET PLAN A: INCREASE SELLING PRICE PER UNIT Original Selling priice: $ 8.00 Sales units (5600,000 /8) = 700,000 units Revised Selling price per unit: $ 8.40 per unit Sales units: 700,000-10% = 630,000 units PLAN B: DECREASE IN SELLING PRICE Revised selling price: 8.00 -0.50 = $ 7.50 per unit Revised sales unit: 700,000+ 100,000 =800,000 units SALES BUDGET PLAN A PLAN B Budgeted Units 630,000 800,000 Selling price per unit 8.4 7.5 Budgeted Sales in $ 5,292,000 6,000,000 Req 2: PLAN A PLAN B Budgeted sale units 630,000 800,000 Add: Ending Inventory 31500 60,000 Total requirement 661500 860000 Less: beginning Inventory 38000 38000 Budgeted Production units 623500 822000 Req 3: PLAN A PLAN B Direct material 1.3 1.3 Direct labour 1.8 1.8 Variable manufacturing overheads 1.2 1.2 Fixed manufacturing OH Plan A ($ 1895000/623500) 3.04 Plan B ($1895,000 /822000) 2.31 UNIT PRODUCT COST 7.34 6.61 Difference in Fixed manufacturing OH per unit due to change in number of units of production. Req 4: PLAN A PLAN B Sales 5,292,000 6,000,000 Less: COGS Plan A (630,000 units @ 7.34) 4624200 Plan B (800,000 units @ 6.61) 5288000 Gross Profits 667,800 712,000 Plan B is better
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