Speier Industries has sales in 2010 of $5,600,000 (800,000 units) and gross profit of $1,344,000. Management is considering two alternative budget plans to increase its gross profit in 2011.

Plan A would increase the selling price per unit from $7.00 to $7.60. Sales volume would decrease by 10% from its 2010 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 2010, Speier has 70,000 units on hand. If Plan A is accepted, the 2011 ending inventory should be equal to 90,000 units. If Plan B is accepted, the ending inventory should be equal to 100,000 units. Each unit produced will cost $2.00 in direct materials, $1.50 in direct labor, and $0.50 in variable overhead. The fixed overhead for 2011 should be $925,000.

Instructions

(a) Prepare a sales budget for 2011 under (1) Plan A and (2) Plan B.

(b) Prepare a production budget for 2011 under (1) Plan A and (2) Plan B.

(c) Compute 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 be accepted?