The Blake Manufacturing Corporation manufactures and sells folding umbrellas. The corporation's condensed income statement for the year at 31 December 2011 follows:
Sales (200,000 units)
£1,000,000
Cost of goods sold
600,000
Gross margin
400,000
Selling expenses
£150,000
Administrative expenses
100,000
Net profit (before income taxes)
£150,000
Blake's budget committee has estimated the following changes for 2012:
- 30% increase in number of units sold
- 20% increase in material cost per unit
- 15% increase in direct labor cost per unit
- 10% increase in variable indirect cost per unit
- 5% increase in indirect fixed costs
- 8% increase in selling expenses, arising solely from increased volume
- 6% increase in administrative expenses, reflecting anticipated higher wage and supply price levels
Any changes in administrative expenses caused solely by increased sales volume are considered immaterial.
Because inventory qualities remain fairly constant, the budget committee considered that for budget purposes any change in inventory valuation can be ignored. The composition of the cost of a unit of finished product during 2011 for materials, direct labor and manufacturing support, respectively, was in the ratio or 3:2:1. In 2011, £40,000 of manufacturing support was for fixed costs. No changes in production methods or credit policies were contemplated for 2012.
In this Shared Activity, your group will assume this consultancy role. You will review current and historical financial data. You will have the opportunity to discuss the organisation's behaviour and reactions to your analyses of this data. Your group will make a recommendation based on a what-if analysis.