Hill Industries had sales in 2016 of $6,800,000 and a gross profit of $1,100,000. 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 100,000 units.
At the end of 2016, Hill has 40,000 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 60,000 units. Each unit produced will cost $1.80 indirect labor, $1.40 indirect materials, and $1.20 in variable overhead. The fixed overhead for 2017 should be $1,000,000.
1. Prepare a sales budget for 2017 under each plan. (Round Unit selling price answers to 2 decimal places, e. g. 52.70.)
2. Prepare a production budget for 2017 under each plan.
3. Compute the production cost per unit under each plan. (Round answers to 2 decimal places, e. g. 1.25.)
4. Compute the gross profit under each plan.
5. Which plan should be accepted?

Results are below.

Explanation:

Giving the following information:

Plan A:

Selling price= $8.4

Sales in units= (6,800,000/8)*0.9= 765,000

Ending inventory should be equal to 5% of the 2017 sales.

Plan B:

Selling price= $7.5

Sales in units= 850,000 + 100,000= 950,000

Ending inventory should be equal to 60,000 units.

Beginning inventory= 40,000 units

Total unitary variable cost= 1.8 + 1.4 + 1.2= $4.4

Total fixed overhead=  $1,000,000

a)

Plan A:

Sales in units= (6,800,000/8)*0.9= 765,000

Sales in dollars= 765,000*8.4= $6,426,000

Plan B:

Sales in units= 850,000 + 100,000= 950,000

Sales in dollars= 950,000*7.5= $7,125,000

b) Production= sales + desired ending inventory - beginning inventory

Plan A:

Production= 765,000 + (765,000*0.05) - 40,000

Production= 763,250

Plan B:

Production= 950,000 + 60,000 - 40,000

Production= 970,000

c)

Plan A:

Unitary variable cost= 4.4

Unitary fixed cost= 1,000,000/763,250= 1.31

Total unitary cost= $5.71

Plan B:

Unitary variable cost= 4.4

Unitary fixed cost= 1,000,000/970,000= 1.031

Total unitary cost= $5.43

d) Gross profit= sales - cost of goods sold

Plan A:

Gross profit= 6,426,000 - 765,000*5.71= $2,057,850

Plan B:

Gross profit= 7,125,000 - 950,000*5.43= $1,966,500

e) The best plan is the one with the highest profit. In this case, Plan A is better.

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