Razorback Company’s 2011 master budget included the following fixed budget report. It is based on an expected production and sales volume of 10,000 units.
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RAZORBACK COMPANY Fixed Budget Report For Year Ended December 31, 2011 |
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Sales |
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$250,000 |
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Cost of goods sold |
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Direct materials |
$100,000 |
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Direct labor |
20,000 |
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Machinery repairs (variable cost) |
3,000 |
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Depreciation—machinery |
11,920 |
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Utilities (80% is variable cost) |
8,000 |
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Plant manager salaries |
6,000 |
148,920 |
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Gross profit |
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101,080 |
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Selling expenses |
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|
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Packaging |
9,000 |
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Shipping |
30,000 |
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Sales salary (fixed annual amount) |
18,000 |
57,000 |
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General and administrative expenses |
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|
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Advertising |
4,000 |
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Salaries |
9,360 |
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Entertainment expense |
10,000 |
23,360 |
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Income from operations |
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$ 20,720 |
Required
1. Classify all items listed in the fixed budget as variable or fixed. Also determine their amounts per unit or their amounts for the year, as appropriate.
2. Prepare flexible budgets (see Exhibit 24.3) for the company at sales volumes of 8,000 and 12,000 units.
3. The company’s business conditions are improving. One possible result is a sales volume of approximately 14,400 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 2011 budgeted amount of $20,720 if this level is reached without increasing capacity?
4. An unfavorable change in business is remotely possible; in this case, production and sales volume for 2011 could fall to 5,000 units. How much income (or loss) from operations would occur if sales volume falls to this level?