Question

Ogleby Industries has sales in 2016 of $5,600,000 (800,000 units) and gross pro t of $1,344,000. Management is considering two alternative budget plans to increase its gross profit in 2017.

Plan A would increase the selling price per unit from $7.00 to $7.60. Sales volume would decrease by 5% from its 2016 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 2016, Ogleby has 70,000 units on hand. If Plan A is accepted, the 2017 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 $2.00 in direct materials, $1.50 in direct labor, and $0.50 in variable overhead. The fixed overhead for 2017 should be $ 980000.

a) Prepare sales budget for 2017 under (1) Plan A and ( 2 ) Plan B.

b) Prepare production budget for 2017 under (1) Plan A and ( 2 ) Plan B.

c) Compute the cost per unit under (1) Plan A and ( 2 ) Plan B. Explain why the cost per unit is different from each of the two plans.

d) Which plan should be accepted ? ( Compute gross profit under each plan )