Phoenix Company’s 2013 master budget included the following fixed budget report. It is based on an expected production and sales volume of 15,000 units.

Problem 23-3A Preparation and analysis of a flexible budget LO P1

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Phoenix Company’s 2013 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, 2013

Sales				$	3,000,000
Cost of goods sold
Direct materials	$	915,000
Direct labor		210,000
Machinery repairs (variable cost)		45,000
Depreciation—plant equipment		330,000
Utilities ($60,000 is variable)		210,000
Plant management salaries		210,000			1,920,000
Gross profit					1,080,000
Selling expenses
Packaging		90,000
Shipping		105,000
Sales salary (fixed annual amount)		235,000			430,000
General and administrative expenses
Advertising expense		100,000
Salaries		230,000
Entertainment expense		90,000			420,000
Income from operations				$	230,000

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. Explanation: Variable sales Sales: $3,000,000 / 15,000 units = $200.00 Variable costs Direct materials: $915,000 / 15,000 units = $61 Direct labor: $210,000 / 15,000 units = $14 Machinery repairs: $45,000 / 15,000 units = $3 Utilities: $60,000 / 15,000 units = $4 Packaging: $90,000 / 15,000 units = $6 Shipping: $105,000 / 15,000 units = $7 Fixed costs Utilities ($210,000 – $60,000 is variable) = $150,000 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 2013 budgeted amount of $230,000 if this level is reached without increasing capacity? Explanation: Operating income increase for a 15,000 to 18,000 unit sales increase                Possible sales (units)     18,000   Units   Contribution margin per unit × $ 105.00                Total contribution margin   $ 1,890,000       Less: Fixed costs     (1,345,000 )            Potential operating income   $ 545,000       vs. Budgeted income for 2013     230,000                Increase   $ 315,000            4. An unfavorable change in business is remotely possible; in this case, production and sales volume for 2013 could fall to 12,000 units. How much income (or loss) from operations would occur if sales volume falls to this level? (Loss should be indicated by minus sign.) Explanation: Operating income (loss) at 12,000 units                Possible sales (units)     12,000   (Units)   Contribution margin per unit × $ 105.00                Total contribution margin   $ 1,260,000       Less: Fixed costs     (1,345,000 )            Potential operating loss   $ (85,000 )