Colt Industries had sales in 2010 of $6,400,000 and gross profit of $1,100,000. Management is considering two alternative budget plans to increase its gross profit in 2011.

Plan A would increase the selling price per unit from $8.00 to $8.40. Sales volume would decrease by 5% from its 2010 level. Plan B would decrease the selling price per unit by $0.50.The marketing department expects that the sales volume would increase by 150,000 units.

At the end of 2010, Colt has 40,000 units of inventory on hand. If Plan A is accepted, the 2011 ending inventory should be equal to 5% of the 2011 sales. If Plan B is accepted, the ending inventory should be equal to 50,000 units. Each unit produced will cost $1.80 in direct labor, $2.00 in direct materials, and $1.20 in variable overhead. The fixed overhead for 2011 should be $1,895,000.

Instructions

(a) Prepare a sales budget for 2011 under each plan.

(b) Prepare a production budget for 2011 under each plan.

(c) Compute the production cost per unit under each plan. Why is the cost per unit different for each of the two plans? (Round to two decimals.)

(d) Which plan should be accepted?