Hindu Industries had sales in 2002 of \($6,300,000\) and gross profit of \($1,500,000\). Management is considering two alternative budget plans to increase its gross profit in 2003.

Plan A would increase the selling price per unit from \($9.00\) to \($9.40\). Sales volume would decrease by 5% from its 2002 level. Plan B would decrease the selling price per unit by \($0.50\). The marketing department expects that the sales volume would increase by 150,000 units. At the end of 2002, Hindu has 30,000 units of inventory on hand. If Plan A is ac- cepted, the 2003 ending inventory should be equal to 4% of the 2003 sales. If Plan B is accepted, the ending inventory should be equal to 40,000 units. Each unit produced will cost \($1.60\) in direct labor, \($2.00\) in direct materials, and \($0.90\) in variable overhead. The fixed overhead for 2003 should be $1,800,000.

Instructions

(a) Prepare a sales budget for 2003 under each plan.

(b) Prepare a production budget for 2003 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? (Hint: Compute the gross profit under each plan.)