Marsh Industries had sales in 2013 of $6,720,000 and gross profit of $1,155,000.

Question

Marsh Industries had sales in 2013 of $6,720,000 and gross profit of $1,155,000. Management is considering two alternative budget plans to increase its gross profit in 2014. Plan A would increase the selling price per unit from $8.40 to $8.82. Sales volume would decrease by 10% from its 2013 level. Plan B would decrease the selling price per unit by $0.53. The marketing department expects that the sales volume would increase by 157,500 units. At the end of 2013, Marsh has 42,000 units of inventory on hand. If Plan A is accepted, the 2014 ending inventory should be equal to 5% of the 2014 sales. If Plan B is accepted, the ending inventory should be equal to 52,500 units. Each unit produced will cost $1.89 in direct labor, $1.31 in direct materials, and $1.26 in variable overhead. The fixed overhead for 2014 should be $1,989,750. Prepare a sales budget for 2014 under each plan. Prepare a production budget for 2014 under each plan.

Explanation / Answer

Plan A Plan B Opening finished goods inventory 42000 42000 Add: Sales during the year 2014 (800000 * 0.90=720000) (800000 + 157500 = 957500 720000 957500 Less: Closing finished goods inventory( 720000 * 5%=36000) 36000 52500 Production during the year 2014 726000 947000 Total variable costs of production (76000 * 4.46 =3237960) $3237960 4223620 add: Fixed costs for the year 2014 $1989750 $1989750 total cost of production for the year 2014 $5227710 6213370 Per unit production cost $5227710 / 726000 =$7.20 6213370 / 947000 =$6.56

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