Hill Industries had sales in 2021 of $6,800,000 and gross profit of $1,100,000. Management is considering two alternative budget plans to increase its gross profit in 2022.

Plan A would increase the unit selling price from $8.00 to $8.40. Sales volume would decrease by 125,000 units from its 2021 level. Plan B would decrease the unit selling price by $0.50. The marketing department expects that the sales volume would increase by 130,000 units.

At the end of 2021, Hill has 40,000 units of inventory on hand. If Plan A is accepted, the 2022 ending inventory should be 35,000 units. If Plan B is accepted, the ending inventory should be 60,000 units. Each unit produced will cost $1.50 in direct labor, $1.30 in direct materials, and $1.20 in variable overhead. The fixed overhead for 2022 should be $1,895,000.

Questions

Compute the production cost per unit under each plan. Why is the cost per unit different for the two plans? (Round to two decimals.) answer: Unit cost: Plan A $6.63 Plan B $5.90

Which plan should be accepted? (Hint: Compute the gross profit under each plan.) answer: Gross profit: Plan A $1,283,250 Plan B $1,568,000