Budgeting; direct material usage, manufacturing cost, and gross margin. Xander

Manufacturing Company manufactures blue rugs using wool and dye as direct materials. One rug

is budgeted to use 36 skeins of wool at a cost of $2 per skein and 0.8 gallons of dye at a cost of

$6 per gallon. All other materials are indirect. At the beginning of the year, Xander has an

inventory of 458,000 skeins of wool at a cost of $961,800 and 4,000 gallons of dye at a cost of

$23,680. Target ending inventory of wool and dye is zero. Xander uses the FIFO inventory cost-

flow method.

Xander blue rugs are very popular and demand is high, but because of capacity

constraints the firm will produce only 200,000 blue rugs per year. The budgeted selling price is

$2,000 each. There are no rugs in the beginning inventory. Target ending inventory of rugs is also

zero.

Xander makes rugs by hand, but uses a machine to dye the wool. Thus, overhead costs

are accumulated in two cost poolsone for dyeing and the other for weaving. Dyeing overhead

is allocated to products based on machine-hours (MH). Weaving overhead is allocated to

products based on direct manufacturing labor-hours (DMLH).

Xander budgets 0.2 machine-hours to dye each skein in the dyeing process. There is no

direct manufacturing labor cost for dyeing. Xander budgets 62 direct manufacturing labor-hours

to weave a rug at a budgeted rate of $13 per hour.

The following table presents the budgeted overhead costs for the dyeing and weaving

cost pools:

Dyeing

(based on 1,440,000 MH)

Weaving

(based on 12,400,000 DMLH)

Variable costs

Indirect materials $ 0 $15,400,000

Maintenance 6,560,000 5,540,000

Utilities 7,550,000 2,890,000

Fixed costs

Indirect labor 347,000 1,700,000

Depreciation 2,100,000 274,000

Other 723,000 5,816,000

Total budgeted costs $17,280,000 $31,620,000

Required:

5. Calculate the budgeted cost of goods sold for blue rugs under each sales assumption. 6. Find the budgeted gross margin for blue rugs under each sales assumption.

7. What actions might you take as a manager to improve profitability if sales drop to 185,000 blue rugs?