Problem 23-3A (Part Level Submission) Hill Industries had sales in 2016 of 7,520

Question

Problem 23-3A (Part Level Submission) Hill Industries had sales in 2016 of 7,520,000 and gross profit of $ 1,233,000 . 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 119,000 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 63,000 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 $ 1,375,000

Explanation / Answer

Current Sales $ 7520,000 (@$8 per unit ) Current sales in Units (7520,000 /8) = 940,000 units PLAN A PLAN B Sales Units Plan A(940,000-10%) 846000 Plan B(940000+119000) 1059000 Add: Closing inventory 42300 63000 Plan A(5% of sales) (Given) Less: Opening inventory-Given 43000 43000 Production units 845300 1079000 Total Cost of Production: Variable: Direct material(@1.40 per unit) 1183420 1510600 Direct labour(@1.80 per unit) 1521540 1942200 Variable Overhead(@1.20 per unit) 1014360 1294800 Fixed 1375000 1375000 Total Cost of production 5,094,320 6,122,600 Units Produced 845300 1079000 Cost per unit 6.03 5.67 COMPUTATION OF GROSS PROFIT PLAN A PLAN B Sales Units 846,000 units 1059,000 units Sales Revenue Plan A(846,000 units @8.40) 7106400 Plan B(1059,000 units @7.50) 7942500 Less: Cost of production Plan A(846,000 units@6.03) 5101380 Plan B (1059,000 units @5.67) 6004530 GROSS PROFIT 2005020 1937970 As Gross profit in Plan A is higher, PLAN A should be accepted

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