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				$	3,000,000
Cost of goods sold
Direct materials	$	945,000
Direct labor		240,000
Machinery repairs (variable cost)		60,000
Depreciation—Plant equipment (straight-line)		315,000
Utilities ($30,000 is variable)		195,000
Plant management salaries		220,000			1,975,000
Gross profit					1,025,000
Selling expenses
Packaging		90,000
Shipping		105,000
Sales salary (fixed annual amount)		235,000			430,000
General and administrative expenses
Advertising expense		150,000
Salaries		241,000
Entertainment expense		90,000			481,000
Income from operations				$	114,000

Problem 21-1A Part 3

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 $114,000 if this level is reached without increasing capacity?

Answer 1

PHOENIX COMPANY
working
For Year Ended December 31, 2017
Units U	15000					18000	units
Divide amount/units	Variable V	Fixed F				V*18000+f
Sales	200			3,000,000			3600000
Cost of goods sold
Direct materials	63		945,000			1134000
Direct labor	16		240,000			288000
Machinery repairs (variable cost)	4		60,000			72000
Depreciation—Plant equipment (straight-line)		315,000	315,000			315000
Utilities ($30,000 is variable)	2	165,000	195,000			201000
Plant management salaries		220,000	220,000	1,975,000		220000	2230000
Gross profit				1,025,000			1370000
Selling expenses
Packaging	6		90,000			108000
Shipping	7		105,000			126000
Sales salary (fixed annual amount)		235,000	235,000	430,000		235000	469000
General and administrative expenses
Advertising expense		150,000	150,000			150000
Salaries		241,000	241,000			241000
Entertainment expense		90,000	90,000	481,000		90000	481000
Income from operations				114,000			420000
Increase in income is (420000-114000)	306,000	answer