QUESTION 1

Speier Industries has sales in 2017 of RM5,600,000 (800,000 units) and gross profit of RM1,344,000. Management is considering two alternative budget plans to increase its gross profit in 2018. Plan A would increase the selling price per unit from RM7.00 to RM7.60. Sales volume would decrease by 10% from its 2017 level. Plan B would decrease the selling price per unit by 5%. The marketing department expects that the sales volume would increase by 100,000 units. At the end of 2017, Speier has 70,000 units on hand. If Plan A is accepted, the 2018 ending inventory should be equal to 90,000 units. If Plan B is accepted, the ending inventory should be equal to 100,000 units. Each unit produced will cost RM2.00 in direct materials, RM1.50 in direct labor and RM0.50 in variable overhead. The fixed overhead for 2018 should be RM925,000.

Required

(a) Prepare a sales budget for 2018 under (1) Plan A and (2) Plan B. (3 marks)

(b) Prepare a production budget for 2018 under (1) Plan A and (2) Plan B. (5 marks)

(c) Compute 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)

(6 marks)

(d) Which plan should be accepted? Show gross profit computations. (4 marks)