Colt Industries had sales in 2011 of $5.6 million (800,000 units) and gross profit of $1,344,000. Management is considering two alternative budget plans to increase its gross profit in 2012.
Plan A would increase the selling price per unit from $7.00 to $7.60. Sales volume would decrease by 10% from its 2011 level. Plan B would decrease the selling price per unit by 10%. The marketing department expects that the sales volume would increase by 100,000 units.
At the end of 2011, Colt has 70,000 units of inventory on hand. If Plan A is accepted, the 2012 ending inventory should be equal to 94,000 units. If Plan B is accepted, the ending inventory should be equal to 100,000 units. Each unit produced will cost $1.50 in direct labour, $2.00 in direct materials, and $0.50 in variable overhead. The fixed overhead for 2012 should be $930,000.
Instructions
(a) Prepare a sales budget for 2012 under each plan.
(b) Prepare a production budget for 2012 under each plan.
(c) Calculate 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?