Xiao Manufacturing Company manufactures blue rugs, using wool and dye as direct materials. One rug is budgeted to use 38 skeins of wool at a cost of $7 per skein and 0.70 gallons of dye at a cost of $ 5 per gallon. All other materials are indirect. At the beginning of the year Xiao has an inventory of 456,000 skeins of wool at a cost of $1,048,800 and 3,400 gallons of dye at a cost of $21,760. Target ending inventory of wool and dye is zero. Xiao uses the FIFO inventory cost flow method.

Additional Info

Xiao blue rugs are very popular and demand is high, but because of capacity constraints the firm will produce only 275,000 blue rugs per year. The budgeted selling price is $2,400 each. There are no rugs in beginning inventory. Target ending inventory of rugs is also zero.

Xiao makes rugs by hand, but uses a machine to dye the wool. Thus, overhead costs are accumulated in two cost pools longone for weaving and the other for dyeing. Weaving overhead is allocated to products based on direct manufacturing labor-hours (DMLH). Dyeing overhead is allocated to products based onmachine-hours (MH).

There is no direct manufacturing labor cost for dyeing. Xiao budgets 48 direct manufacturing labor-hours to weave a rug at a budgeted rate of $ 17 per hour. It budgets 0.30 machine-hours to dye each skein in the dyeing process.

The following table presents the budgeted overhead costs for the dyeing and weaving cost pools:
	Dyeing	Weaving
	(based on 3,135,000 MH)	(based on 13,200,000 DMLH)
Variable costs
Indirect materials	$0	$15,510,000
Maintenance	6,590,000	5,540,000
Utilities	7,595,000	2,705,000
Fixed costs
Indirect labor	392,000	1,760,000
Depreciation	2,221,000	285,000
Other	758,000	5,880,000
Total budgeted costs	$17,556,000	$31,680,000

Requirements

4.	Prepare a revenues budget for blue rugs for the year, assuming Xiao sells (a) 275,000 or (b) 255,000 blue rugs (that is, at two different sales levels).
5.	Calculate the budgeted cost of goods sold for blue rugs under each sales assumption.
6.	Find the budgeted gross margin for blue rugs under each sales assumption.
7.	What actions might you take as a manager to improve profitability if sales drop to 255,000 blue rugs?
8.	How might top management at Xiao use the budget developed in requirements 1-6 to better manage the company?