ad Only - You can't save changes to this fi... Forecast Sales Direct Material Costs Direct Labour Cost Variable Factory Overhead Fixed Factory Overhead Costs of Goods Sold Gross Profit Corporate Fixed Costs Operating Profit Income Statement 5,000,000 (1,000,000) (1,250,000) (750,000) (1,000,000) (4,000,000) 1,000,000 (750,000) 250,000 The entity above prepared the forecasted income statement presented. The entity expects to sell 250,000 units during the next year. The entity uses a process costing system, and the Human Resources Department has been asked to achieve the forecasted level of labour costs. There is a need to hire skilled employees at a maximum of $25 per hour including benefits and keep total hours worked at 50,000. Questions (show your calculations) 1. What is the contribution margin ratio and contribution per unit? 2. What is break-even sales dollars and units? 3. What is the safety margin of the forecasted sales level versus break-even sales? 4. The entity would prefer to achieve an operating profit of $500,000. What is the level of required sales units and dollars? 5. If Direct Labour Cost goes up by $250,000, what happens to break-even sales units for the year? What is a policy that the Human Resources Department should recommend to monitor the labour cost forecast? Part 2 - Top-Down Operating Budget An entity expects its sales to be $6,000,000 next year. The past year's income statement is as set out below. Using a top-down percentage of sales approach forecast the income statement for next year and answer the questions below. Fixed costs are expected to increase as the sales volumes increase. Actual Last Year Sales Direct Material Costs Direct Labour Cost Variable Factory Overhead Fised Factory Overhead Costs of Goods Sold Gres Pont Corporate Fined Costs Operating Profit Taxes Net Income In Statement 5,000,000 11.000.000 11.250.000) (750,000 11.000.000 14.000.000 1.000.000 (750.000 250.000 150.000) 200,000 100.0 -20.0% -25.0 -15.0% -20.0% -80.0% 20.0% -15.0M 5.0 -1.0% 40 Questions (show your calculations where applicable) 1. Prepare an income statement forecast for the next year at $6,000,000 of sales. This is considered a static budget for next year. 2. If the entity instead used a flexible budget approach and actual sales were $6,500,000, prepare a budget for next year. 3. If actual Director Labour Cost for next year is $1,625,000, what amount would the Human Resources Department have to explain under a: a. Static Budget b. Flexible Budget 4. Sales each month under the static budget are $500,000. These sales are collected 50% in month 1 of the sale and 50% in month 2 after the sale. Monthly operating expenses are $400,000 a month and paid 4. Sales each month under the static budget are $500,000. These sales are collected 50% in month 1 of the sale and 50% in month 2 after the sale. Monthly operating expenses are $400,000 a month and paid in the month incurred. Describe the cash flow consequences of these timing differences. 5. What type of responsibility center is the Human Resources Department? Part 3 - Bottoms-Up Operating Budget Use the following data to prepare a bottoms- up budget and answer the questions below. Sales: The company expects to sell 300,000 units and had beginning finished inventory of 25,000 units and desires ending finished inventory of 30,000 units. The sale price is $20 per unit and the overall product cost is $16 per unit (total product costs are reported in "cost of goods sold") Direct Material Cost: Material costs are $4 per unit. The company desires ending material inventory of $130,000 ($4 per unit) and had beginning material inventory of 120,000 ($4 per unit). Material used in production is transferred to work in process inventory. Direct Labour Cost: The company expects direct labour hours to be 60,000 at $26.50 per hour. This cost is part of work in process inventory Factory Overhead Cost: The total operating budget is $2,100,000 for factory overhead. This cost is part of work in process inventory. Work in Process Inventory: The company had beginning work in process inventory of $520,000 and desires ending work in process inventory of $560,000. unit. The company desires ending material inventory of $130,000 ($4 per unit) and had beginning material inventory of 120,000 ($4 per unit). Material used in production is transferred to work in process inventory. Direct Labour Cost: The company expects direct labour hours to be 60,000 at $26.50 per hour. This cost is part of work in process inventory Factory Overhead Cost: The total operating budget is $2,100,000 for factory overhead. This cost is part of work in process inventory. Work in Process Inventory: The company had beginning work in process inventory of $520,000 and desires ending work in process inventory of $560,000. Corporate overhead and taxes are estimated at $900,000 and $60,000 respectively. Questions (show calculations where applicable) 1. Prepare a bottoms-up income statement. Sales Cost of Goods Sold Gross Profit Corporate Overhead Expenses Earnings before Taxes Taxes Net Income 2. What are the total product costs in the income statement? 3. Prepare a direct materials purchases budget. 4. What type of cost is Direct Labour in the budget? 5. What would be the impact (up or down versus sales units) on production units if the company decided to increase ending finished inventory