Budgeting: Lady Gaga Company had 2014 sales of $9,000,000 (600,000 units). Manag

Question

Budgeting: Lady Gaga Company had 2014 sales of $9,000,000 (600,000 units). Management is considering two mutually exclusive options for 2015 in hopes of increasing the firm's gross margin: Plan M and Plan P. The firm ended 2014 with 120,000 units on hand. For 2015 and in Plan M, the direct materials are estimated to cost $3.00 per unit, direct labor is estimated at $2.50 per unit and variable overhead is estimated at 50% of the direct labor costs per unit. Fixed manufacturing costs for 2015 are estimated at $1,500,000 under Plan M. For 2015 and in Plan P, the direct materials are estimated to cost $4.00 per unit, direct labor is estimated at $1.60 per unit and variable overhead is estimated at the direct labor costs per unit. Fixed manufacturing costs for 2015 are 70% of estimated at $2,600,000 under Plan P. Plan M: will increase the selling price per unit from $15 to $18.00 while achieving a modest increase in the firm's sales volume by 10% from its 2014 level. The increase in sales volume is due to an increase in the perceived value of the product. Plan M calls for an ending inventory at December 31, 2015 of 140,000 units. Plan P: will increase the selling price per unit by 30% and increase the sales volume by 30,000 units from the 2014 level. Plan P calls for an ending inventory at December 31, 2015 of 80,000 units. For simplicity and for both plans, assume the cost per unit sold in 2015 equals the manufacturing cost per unit made in 2015 as determined separately for each of the plans under consideration.

Explanation / Answer

a) number of units budgeted to be sold

plan M = sale volume in 2014 + 10% of sale volume of 2014

= 600000 + (600000*10%)

= 600000+60000

=660000 units

plan p = sale volume in 2014+ 30000 units

= 600000+30000

= 630000

b) units budgeted to be manufactured

=Closing balance of units + units sold - opening balance

plan M = 140000+660000-120000

= 680000

plan p = 80000+630000-120000

= 590000

c) budgeted Gross margin = (selling price - direct material - direct labour - variable overhead)

plan M = (18-3-2.5-1.25)

= 11.25

plan p = (19.5-4-1.6-1.12)

= 12.78

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