Litwin Industries has sales in 2010 of \(\$ 4,900,000\) (700,000 units) and gross profit of \(\$ 1,187,500\). 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, Litwin 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 \(\$ 975,000\).

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?