Hill Industries had sales in 2016 of $7,520,000 and gross profit of $1,204,000.
ID: 2576017 • Letter: H
Question
Hill Industries had sales in 2016 of $7,520,000 and gross profit of $1,204,000. 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 117,000 units.
At the end of 2016, Hill has 42,000 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 71,000 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 $1,649,000.
Plan A
Plan B
LINK TO TEXT
Plan A
Plan B
LINK TO TEXT
Plan A
Plan B
LINK TO TEXT
Plan A
Plan B
Hill Industries had sales in 2016 of $7,520,000 and gross profit of $1,204,000. 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 117,000 units.
At the end of 2016, Hill has 42,000 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 71,000 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 $1,649,000.
Explanation / Answer
Sales budget for 2017 under each plan: Plan A Plan B Expected unit sales (Note:1) 846000 1057000 Unit selling price 8.4 7.5 (8-0.50) Total sales 7106400 7927500 Notes: 1. Plan A Current sales in units=Sales value/Selling price per unit=7520000/8=940000 units Expected sales in units=940000*90%=846000 Plan B Current sales in units=Sales value/Selling price per unit=7520000/8=940000 units Expected sales in units=940000+117000=1057000 Production budget for 2017 under each plan Plan A Plan B Desired ending inventory 42300 71000 (5% of 2017 sales) (846000*5%) Add:Expected sales in units 846000 1057000 888300 1128000 Less;Beginning inventory 42000 42000 Units to be produced 846300 1086000 production cost per unit under each plan Plan A Plan B Direct material 1.4 1.4 Direct labor 1.8 1.8 Variable overhead 1.2 1.2 fixed overhead (Total fixed overhead/Units 1.95 1.52 to be produced) (1649000/846300) (1649000/1086000) Production cost per unit 6.35 5.92 Gross profit under each plan Plan A Plan B Unit selling price 8.4 7.5 Production cost per unit 6.35 5.92 Gross profit per unit 2.05 1.58 Expected unit sales 846000 1057000 Gross profit 1735585 1671734 Plan A should be accepted since gross profit is more under Plan A
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