Intermediate: Preparation of a flexible budget

(a) Exe pic manufactures one standard product and in common with other companies in the industry is suffering from the current depress ion in the market. Currently it is operating at a norma l level of activity of 70% which represents an output of 6300 units, but the sales director believes that a realistic forecast for the next budget period would be a level of activity of 50%.

Profit is 20% of selling price.
You are required, from the data given in the current flexible budget above, to prepare a budget based on a level of activity of 50%, which should show clearly the contribution which could be expected.

(b) Discuss briefly three prob lems which may arise from such a change in level of activity.

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Level of activity 60% 70% 80% () () () Direct materials Direct wages 37 800 44100 50 400 16200 18900 21 600 Production overhead 37600 41200 44 800 Administration overhead 31.500 31500 31 500 Selling and distribution overhead 42 300 44100 45 900 Total cost 165 400 179 800 194 200