Robertson Company has sales in 2013 of $5,600,000 (800,000 units) and gross profit of $1,344,000. Management is considering two alternative budget plans to increase its gross profit in 2014.

Plan A would increase the selling price per unit from $7.00 to $7.60. Sales volume would decrease by 5% from its 2013 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 the 2013, Roberston has 70,000 units on hand. If Plan A is accepted, the 2014 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 porduced will cost $2.00 in direct materials, $1.50 in direct labor; and $.50 in variable overhead. The fixed overhead for 2014 should be $980,000.

Instructions

(a) Prepare a sales budget for 2014 under (1) Plan A and (2) Plan B.

(B) Prepare a production budget for 2014 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 for each of the two plans.

(d) which plan should be accepted? (Hint: Compute the gross profit under each plan. )