Litwin Industries had sales in 2011 of $5.6 million (800,000 units) and a 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 to $7.60. Sales volume would decrease by 10% from its 2011 level. Plan B would decrease the selling price per unit by 5%. The marketing department expects that the sales volume would increase by 100,000 units.
At the end of 2011, Litwin had 70,000 units on hand. If it accepts Plan A, the 2012 ending inventory should be equal to 90,000 units. If it accepts Plan B, the ending inventory should be equal to 100,000 units. Each unit produced will cost $2 in direct materials, $1.50 in direct labour, and $0.50 in variable overhead. The fixed overhead for 2012 should be $925,000.
Instructions
(a) Prepare a sales budget for 2012 under (1) Plan A and (2) Plan B.
(b) Prepare a production budget for 2012 under (1) Plan A and (2) Plan B.
(c) Calculate the cost per unit under (1) Plan A and (2) Plan B. Explain why the cost per unit is different for each of the two plans. (Round to two decimals.)
(d) Which plan should Litwin Industries accept?