Swifty Industries had sales in 2016 of $7,520,000 and gross profit of $1,261,000. Management is considering two alternative budget plans to increase its gross profit in 2017. Plan A would increase the selling price per unit from $8.00 to $8.40. Sales volume would decrease by 10% from its 2016 level. Plan B would decrease the selling price per unit by $0.50. The marketing department expects that the sales volume would increase by 115,000 units. At the end of 2016, Swifty has 45,000 units of inventory on hand. If Plan A is accepted, the 2017 ending inventory should be equal to 5% of the 2017 sales. If Plan B is accepted, the ending inventory should be equal to 66,000 units. Each unit produced will cost $1.80 in direct labor, $1.40 in direct materials, and $1.20 in variable overhead. The fixed overhead for 2017 should be $1,553,000.
1. Prepare a sales budget for 2017 under each plan.
2. Prepare a production budget for 2017 under each plan.
3. Compute the production cost per unit under each plan.
4. Compute the gross profit under each plan.
5. Which plan should be accepted?

Kindly check explanation

Explanation:

2016 volume = 7520000 ÷ 8 = 940,000

Plan A volume = 940,000 - (0.1×940000) = 846000

Plan A selling price = $8.40

Plan B selling price = $(8 - 0.5) = $7.5

Plan B volume = $940,000 + 115,000 = 1,055,000

SALES BUDGET ;

— Plan A. PlanB

Expected unit sale-846,000; 1055000

Unit selling price - $8.40. ; $7.50

Total sales - $7,106,400; $7,912,500

PRODUCTION BUDGET ;

PlanA. PlanB

Expected unit sales- 846000. 1055000

Add:

ending inventory - 42,300. 66,000

Total required unit - 888300. 1,121,000

Less:

Beg. finished goods - 45000. 45000

Tot. required goods - 843,300. 1,076,000

C.

Variable cost = $(1.80+1.40+1.20) = $4.40

Variable cost(PlanA) = $4.40 × 843300 = $3,710,520

Variable cost(PlanB) = $4.40 × 1076000 = $4,734,400

PlanA. PlanB

Variable cost 3,710,520. 4,734,400

Fixed cost 1553000. 1553000

Total cost(c) 5,263,520. 6,287,400

Total unit(u). 843,300. 1,076,000

Unit cost (c/u) $6.24. $5.84

D.) GROSS PROFIT

Cost of goods sold(PlanA) = $6.24 × 846000 = $5,279,040

Cost of goods sold(PlanB) = $5.84 × 1055000 = $6,161,200

PlanA. PlanB

SALES. $7,106,400 $7,912,500

Cost of goods sold. $5,279,040. $6,161,200

Gross profit. $1,827,360 $1,751,300

E.) Plan A should be accepted due to it's higher gross profit margin

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