Hekou Industries had sales in 2019 of HK$6,800,000 and gross profit of HK$1,100,000. Management is considering two alternative budget plans to increase its gross profit in 2020. 

Plan A would increase the selling price per unit from HK$8.00 to HK$8.40. Sales volume would decrease by 10% from its 2019 level. Plan B would decrease the selling price per unit by HK$0.50. The marketing department expects that the sales volume would increase by 100,000 units. 

At the end of 2019, Hekou has 40,000 units of inventory on hand. If Plan A is accepted, the 2020 ending inventory should be equal to 5% of the 2020 sales. If Plan B is accepted, the ending inventory should be equal to 60,000 units. Each unit produced will cost HK$1.80 in direct labor, HK$1.40 in direct materials, and HK$1.20 in variable overhead. The fi xed overhead for 2020 should be HK$1,895,000. 

Instructions

a. Prepare a sales budget for 2020 under each plan.

b. Prepare a production budget for 2020 under each plan.

c. Compute the production cost per unit under each plan. Why is the cost per unit different for each of the two plans? (Round to two decimals.)

d. Which plan should be accepted?