Question 2 (34 marks)

Universal Toys Company is planning to launch a new toy to the market. Below is the expected production and operating costs on the new toy:

Selling Price	$350 per unit
Direct materials	$120 per unit
Direct labor	$180 per unit
Electric power	$3.20 per unit
Supervisor salaries	$25,000 per year
Advertising and Selling Expenses	$120,000 per year
Salesperson salaries (5 persons)	$360,000 per year

The annual expected sales of the new toy is 10,000 units.

The management of the company is deciding whether Static or Flexible budget should be used for evaluating the operating performance of this new toy. If flexible budget to be adopted, the following expenses will be calculated based on the expected annual sales volume:

Advertising and Selling Expenses	$10 per unit
Salesperson salaries (5 persons):
Basic Salary per person	$15,000 per year
Total Commission	$20 per unit

Required:
(a)	Prepare a Static and Flexible budget of Statement of Operation for Universal Toys Company.	(24 marks)
(b)	Which type of budgeting method should be adopted for evaluating the operating performance of the new toy? Explain.	(10 marks)