Colt Industries had sales in 2015 of $5.6 million and gross profit of $1.1 million. Management is considering two alternative budget plans to increase its gross profit in 2016.

Plan A would increase the selling price per unit from $8.00 to $8.40. Sales volume would decrease by 10% from its 2015 level. Plan B would decrease the selling price per unit by $0.50. The marketing department expects that the sales volume would increase by 100,000 units.

At the end of 2015, Colt has 38,000 units of inventory on hand. If Plan A is accepted, the 2016 ending inventory should be equal to 5% of the 2016 sales. If Plan B is accepted, the ending inventory should be equal to 60,000 units. Each unit produced will cost $1.80 in direct labour, $1.30 in direct materials, and $1.20 in variable overhead. The fixed overhead for 2016 should be $1,895,000.

Instructions

(a) Prepare a sales budget for 2016 under each plan.

(b) Prepare a production budget for 2016 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?

(d) Which plan should be accepted?