Preparation of flexible budget, separation of fixed and variable costs and comments on variances Secondline Ltd, aware of the uncertain nature of its market for the coming year has prepared budgeted profit forecasts based on 90%, 100% and 105%

activity as follows:

In fact actual activity has turned out far worse than expected and only 37500 units have been sold, with the following results:

You are also told that:
(i) The budgeted selling price is £30 per unit.
(ii) All production is sold.
(iii) The fixed element of the budgeted costs will remain unchanged to all levels of production.
Required:

(a) Prepare a statement for the year showing the flexed budget at the actual level of activity, the actual results and the variance of each item of revenue and cost. (10 marks)
Examine the variances of £20000 or greater, analysing the possible reasons for such variances and the follow-up action management can take. (9 marks)
Secondline Ltd had seen that sales were likely to be depressed for the coming year and its sales team had secured a potential order for all the spare capacity from actual activity up to 100% activity. For this order a special selling price of £25 per unit had been agreed and budgeted variable administration costs would increase by 25%, budgeted variable production overhead costs by 20% and budgeted variable labour costs by £1 per unit. All other costs would remain the same.
Recommended whether Secondline should have maintained 100% activity for the year by accepting the order detailed above. Clearly state the reasons for your decision and show any workings.

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90% 100% 105% () () () Revenue Less: Material costs 1 350 000 1 500 000 1 575 000 337 500 375 000 393 750 Labour costs 440 000 485 000 507 500 Production overhead 217500 235 000 243 750 costs Administration costs 120000 130 000 135 000 Selling and distribution costs 70 000 75 000 77 500 Net profit 1 185 000 1 300 000 1 357 500 165 000 200 000 217 500