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Phoenix Company's 2015 master budget included the following fixed budget report. It is based on an expected production and sales volume of 15,000 units
PHOENIX COMPANY Fixed Budget Report For Year Ended December 31, 2015
Sales $ 3,150,000
Cost of goods sold
Direct materials $975,000
Direct labor 240,000
Machinery repairs (variable cost) 60,000
Depreciation-plant equipment
(straight-line) 315,000
Utilities ($60,000 is variable) 180,000
Plant management salaries 190,000 1,960,000
Gross profit 1,190,000
Selling expenses
Packaging 75,000
Shipping 105,000
Sales salary (fixed annual amount) 235,000 415,000
General and administrative expenses
Advertising expense 100,000
Salaries 230,000
Entertainment expense 80,000 410,000
Income from operations $365,000
1&2. Prepare flexible budgets for the company at sales volumes of 14,000 and 16,000 units and classify all items listed in the fixed budget as variable or fixed.
3. The company's business conditions are improving. One possible result is a sales volume of approximately 18,000 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 2015 budgeted amount of $365,000 if this level is reached without increasing capacity?

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Answer:

Explanation:                    

                                          15,000            14,000        16,000       Unit cost

Sales                                  3,150,000    2,940,000    3,360,000     210

Cost of goods          

Direct materials               975,000         910,000        1,040,000      65

Direct labor                       240,000          224,000        256,000       16

Machinery repairs              60,000            56,000         64,000         4

Utilities                                  60,000          56,000           64,000        4

Packaging                             75,000           70,000            80,000       5

Shipping                               105,000           98,000           112,000      7

Total variable expenses    1,515,000         1,414,000      1,616,000   101

Contribution                        1,635,000        1,526,000      1,744,000  109

Fixed cost

Depreciation                         315,000              315,000        315,000

Utilities                                   120,000              120,000        120,000

Plant salary                             190,000              190,000        190,000

Sales salary                              235,000            235,000        235,000

Advertising                               100,000             100,000         100,000

salaries                                       230,000             230,000       230,000

Entertainment                             80,000                 80,000         80,000

Total fixed expenses                   1,270,000           1,270,000     1,270,000

Profit                                           365,000                256,000        474,000

For 18,000 units

Sales - 18,000* 210                  3,780,000

Variable cost (109*18) =           1,962,000

Fixed cost                                   1,270,000

Operating income                      548,000

Increase over 2015 = 365,000 - 548,000= 183,000

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