Question

Phoenix Company’s 2017 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, 2017
Sales				$	3,150,000
Cost of goods sold
Direct materials	$	900,000
Direct labor		210,000
Machinery repairs (variable cost)		60,000
Depreciation—Plant equipment (straight-line)		300,000
Utilities ($45,000 is variable)		195,000
Plant management salaries		190,000			1,855,000
Gross profit					1,295,000
Selling expenses
Packaging		75,000
Shipping		90,000
Sales salary (fixed annual amount)		235,000			400,000
General and administrative expenses
Advertising expense		100,000
Salaries		230,000
Entertainment expense		90,000			420,000
Income from operations				$	475,000

3. The company’s business conditions are improving. One possible result is a sales volume of 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 2017 budgeted amount of $475,000 if this level is reached without increasing capacity?

Answer 1

Forecasted Contribution Margin Income Statement
For the year ended December 31,2017
Sales (in units)	15000	18000
Contribution margin (per unit)	118	118
Contribution margin	1770000	2124000
Fixed costs	(1295000)	(1295000)
Operating income	475000	829000	354000	Operating income increase
Workings:
	Variable Amount per Unit	Total Fixed Cost
Sales	210
Variable costs:
Direct materials	60
Direct labor	14
Machinery repairs	4
Utilities	3
Packaging	5
Shipping	6
Total variable costs	92
Contribution margin	118
Fixed costs
Depreciation—Plant equipment		300000
Advertising expense		100000
Entertainment expense		90000
Plant management salaries		190000
Utilities		150000
Sales salary		235000
Salaries		230000
Total fixed costs		1295000