Case P
Part I - Mercer Inc. is preparing its annual budgets for the year ending December 31, 201X. Accounting assistants furnish the following data.
Product Product
LN35 LN40
Sales budget:
Anticipated volume in units 300,000 180,000
Unit selling price $20 $30
Production budget:
Desired ending finished goods units 30,000 25,000
Beginning finished goods units 20,000 15,000
Direct materials budget:
Direct materials per unit (pounds) 2 3
Desired ending direct materials pounds 50,000 20,000
Beginning direct materials pounds 40,000 10,000
Cost per pound $2 $3
Direct labor budget:
Direct labor time per unit 0.5 0.75
Direct labor rate per hour $12 $12
Budgeted income statement:
Total unit cost $11 $20
An accounting assistant has prepared the detailed manufacturing overhead budget and the selling and administrative expense budget. The latter shows selling expenses of $560,000 for product LN35 and $440,000 for product LN40, and administrative expenses of $420,000 for product LN35 and $380,000 for product LN40. Income taxes are expected to be 30%.
Prepare the following budgets for the year. Show data for each product. Quarterly budgets should not be prepared.
A. Sales
B. Production
C. Direct materials
D. Direct labor
E. Income statement (Note: Income taxes are not allocated to the products.)
Part II - Litwin Industries has sales in 2011 of $4,900,000 (700,000 units) and gross profit of $1,187,500. Management is considering two alternative budget plans to increase its gross profit in 2012.
Plan A would increase the selling price per unit from $7.00 to $7.60. Sales volume would decrease by 10% from its 2008 level. Plan B would decrease the selling price per unit by 5%. The marketing department expects that the sales volume would increase by 100,000 units.
At the end of 2011, Litwin has 70,000 units on hand. If Plan A is accepted, the 2012 ending inventory should be equal to 90,000 units. If Plan B is accepted, the ending inventory should be equal to 100,000 units. Each unit produced will cost $2.00 in direct materials, $1.50 in direct labor, and $0.50 in variable overhead. The fixed overhead for 2009 should be $975,000.
Instructions:
a. Prepare a sales budget for 2012 under (1) Plan A and (2) Plan B.
b. Prepare a production budget for 2012 under (1) Plan A and (2) Plan B.
c. Compute the cost per unit under (1) Plan A and (2) Plan B. Explain why the cost per unit is different for each of the two plans. (Round to two decimals.)
d. Which plan should be accepted? (Hint: Compute the gross profit under each plan.)
Part III - Medico Medical Supply Company uses flexible budgets that are based on the following data:
Sales commissions 5% of sales
Advertising expense 12% of sales
Miscellaneous selling expense $2,000 plus 3% of sales
Office salaries expense $8,000 per month
Office supplies expense 2% of sales
Miscellaneous administrative expense $500 per month plus 1% of sales
Instructions: Prepare a flexible selling and administrative expenses budget for May 2011, for sales volumes of $120,000, $160,000, and $200,000.