Essex Fuel Pumps sells its product directly to auto manufacturers as well as in the replacement market. The owner and CEO of the company, Claire Balderson, believes in keeping tight control over operations through careful planning. Over time, Claire and her accountants have followed a practice of starting the annual budgeting process around December 15 of every year for the following calendar year.

They first come up with an initial draft of the budget based on marketing forecasts and actual results from the prior three years. Formulating this initial draft is a fourstep process.

• The marketing manager projects the demand in units. The projected selling price per unit is the average price over the last three years.

• The accountant classifies all expenses into fixed and variable categories. The accountant makes this classification by examining the cost per unit for manufacturing expenses and the cost per sales dollar for selling, general, and administrative expenses.

If the cost per unit or sales dollar remains relatively stable as activity volume changes, then the expense is classified as variable. However, if the cost per unit or sales dollar decreases substantially as activity volume increases, then the expense is classified as fixed.

• For each expense classified as fixed, the accountant uses the average expense over the last three years as the estimate for the initial budget.

• For expenses classified as variable, the accountant calculates the average amount per unit (for manufacturing expenses) or the average amount per sales dollar (for selling, general, and administrative expenses) for each year and then averages these amounts over the three years. The accountant then uses these estimates to project variable costs for the coming year.

It is now time to initiate the 2009 budget. Essex’s operating results for the last three years were as follows (even though the 2008 year has not ended yet, only two weeks remain and therefore the operating results for the year are available):

The marketing manager is very optimistic about 2009, and projects the demand for 2009 to be 150,000 fuel pumps. Obviously pleased, Claire sets about the task of preparing the annual budget for the coming year.

Required:
a. Classify each of Essex’s expenses as being a
(1) Variable manufacturing cost;
(2) Variable selling cost;
(3) Fixed manufacturing cost; or
(4) Fixed selling cost.
b. Prepare estimates for revenues and each cost category for 2009. Using these estimates, prepare Essex’s budgeted income statement for 2009.

c. Evaluate the assumptions underlying the budget in light of the unusually optimistic demand projection by the marketingmanager.

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2006 2007 2008 Sales in units Revenues Direct materials Direct labor Plant maintenance Plant depreciation Indirect labor Engineering design Utilities Plant administration Marketing administration Sales force commissions Plant supervision 95.000 $4,480,000 $6,160,000 $5,320,000 $950,000 1,401,250 736,500 427,500 199,800 240.000 95,950 310,000 190,000 159,600 300,000 80,000 110,000 1,140,000 720,000 420,000 163,200 220,000 81,600 325,000 180,000 134,400 275,000 816,000 $1,11,000 1,595,000 742,500 440,000 227,700 230,000 113,300 12,500 185,000 184,800 280,000 2006 2007 2008 Units Revenues Unit price Direct materials Direct labor Indirect labor Utilities Total Cast per unit Sales force commissions Cost per sales $ Plant maintenance Plant depreciation Engineering design Plant administration Marketing administration Plant supervision 110,000 95,000 $4,480,000 $6,160,000 $5,320,000 $56.00 $950,000 1,401250 193,800 95,950 $1,956,245 $3,047,000 $2,641,000 $27.80 $159,600 80.03 $736,500 427,500 240,000 310,000 190,000 300,000 $2,140,000 2,190,000 $2,204,000 80,000 $56.00 $816,000 $1.111,000 1,140,000 1,595,000 227,700 113,300 $56.00 163,200 81,600 $2751 $134,400 $0.03 $720,000 420,000 220,000 325,000 180,000 275,000 $27.70 $184,800 $0.03 $742,500 440,000 230,000 312,500 185,000 280,000 tal fixed costs