P10.47B

Prepare sales and production budgets and calculate the cost per unit under two plans.

(LO 2) Litwin Industries had sales in 2019 of $5.6 million (800,000 units) and a gross profit of $1,344,000. Management is considering two alternative budget plans to increase its gross profit in 2020.

Plan A would increase the selling price per unit from $7 to $7.60. Sales volume would decrease by 5% from its 2019 level. Plan B would decrease the selling price per unit by 5%. The marketing department expects that the sales volume would increase by 150,000 units.

At the end of 2019, Litwin had 70,000 units on hand. If it accepts Plan A, the 2020 ending inventory should be equal to 90,000 units. If it accepts Plan B, the ending inventory should be equal to 100,000 units. Each unit produced will cost $2 in direct materials, $1.50 in direct labour, and $0.50 in variable overhead. The fixed overhead for 2020 should be $980,000.

Instructions

a.Prepare one sales budget for 2020 under (1) Plan A and (2) Plan B.

b.Prepare one production budget for 2020 under (1) Plan A and (2) Plan B.

c.Calculate 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 Litwin Industries accept? (Hint:Calculate the gross profit under each plan.)