The Ace of Spades is a company that manufactures high-end tennis racquets.

Mr. McWebbing is the company President. He has just received the financial statements from his accountant for the fourth fiscal year ending October 31, 2005. He would really like to compare it with the budget he prepared at the beginning of the fiscal year in order to understand why there are some variances. You obtain the following information so that you can respond to Mr. McWebbings questions:

1) The following budget was adopted at the start of the fourth year:

Ace of Spades Inc. Budgeted Income Statement (initial budget) For the fiscal year ending October 31, 2005

Sales (2,300 units x $400) $920,000

Costs of sold goods

Direct materials

Gut string (1 metre per unit x $5) $11,500

Graphite (500g per unit x $40 per kg) 46,000

Miscellaneous($21 per unit) 48,300 105,800

Direct labour (5 hours per unit x $20 per hour) 230,000

Manufacturing overhead

Variable

Plant supplies ($6 per metre of gut string) 13,800

Fixed Indirect labour 95,000

Other fixed overhead 60,000 168,800

Gross margin 415,400

Marketing and administrative costs

Salaries (fixed cost) 155,000

Commissions (10% of sales) 92,000

Advertising (mixed cost) 21,200

Other administrative costs

(fixed cost) 60,000 328,200

Operating income $87,200

2) After examining and discussing the actual results from the financial statements that Mr. McWebbing has just received, the following points become apparent:

a) Actual sales amounted to 2,500 units at $410 each; 5 of 10

b) Direct labour was paid at an average rate of $19 an hour;

c) Each racquet required 5.5 hours of direct labour to produce;

d) Indirect labour costs were $105,000, and other fixed manufacturing overhead costs were $55,000;

e) 1,200 kilograms of graphite and 2,275 metres of gut string were used;

f) A kilo of graphite cost an average of $44, and a metre of gut string cost $5. The other direct materials cost $50,000;

g) Plant supplies cost $15,015, and were the only variable manufacturing overhead cost;

h) Administrative salaries amounted to $165,000, and other administrative costs were $55,000;

i) The advertising contract required a monthly payment of $1,000 plus a royalty of $0.01 per dollar of sales.

Required:

1) Prepare a flexible budget income statement for the fiscal year ended March 31, 2005.