1. Since its inception, Lockitt, Inc. has operated at a batch size of 50 units. The number was set at 50, based on the production volume at that time. Founder Brett Lockden is interested in knowing the financial impact of increasing the batch size to 70, which is the maximum machine capacity at the current machine settings. What would be the direct labor cost and variable overhead cost if Lockitt, Inc. changes the batch size to 70 units? Given the managements desire to lower costs, would you recommend this change in batch size? Critically evaluate this decision considering both financial and nonfinancial factors.

2. The government says that the viral pandemic is unlikely to impact the United States, but nongovernmental sources are predicting that the viral pandemic will impact the United States toward the end of the first quarter of 2020 and the economic impact will be visible in the second quarter of 2020. You realize that the sales projections that were given to you do not reflect the possible impact of the viral pandemic. You spoke to your uncle who works for the World Economic Forum to understand the impact of infectious diseases on the manufacturing sector. Based on the information he provided, you assume that the monthly sales volume for the second quarter will be 15% lower than the original projections if the virus spreads to the United States. Using the operating budget you prepared, calculate the following, assuming that monthly sales volumes for quarter two are 15% lower than initially projected:

a. Budgeted net income for the first quarter of 2020

b. Total cost of direct materials to be purchased for the first quarter

3. After seeing the answers to Question 2 (budgeted numbers based on your assumption that the monthly sales volume in the second quarter would be 15% lower than the original projection), you were eager to share this information with Lockden. Therefore, you scheduled a meeting with Lockden. His first reaction was, Well, I agree with the government. I do not think that the virus will impact us. Even if it does, it will not be until the second quarter. So, how can the first quarter numbers be impacted? Are you sure you did not make a mistake? Explain why the budgeted net income and cost of direct materials to be purchased for the first quarter would be impacted by a change that is predicted to happen in the second quarter.

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4. Since Lockdens academic background is engineering, not accounting, he is not familiar with different approaches to budgeting and the advantages and disadvantages associated with each approach. All he knows is that, in the past, Ted Contador created the budgets on his own and handed the budgets to the managers who are responsible for implementing them. Recently, Lockden read about top-down and bottom-up budgets, and he asked you to educate him on the advantages and disadvantages of each of these budgeting approaches.