Problem: Light power manufactures laptops which sell for $2,500 each. The company has fixed manufacturing overhead of $4,000,000 per year, of which $1,000,000 is depreciation, a non cash expense. The company's fixed selling and administrative expense is $3,000,000 per year. Assume taxes are a fixed $1,000,0000, which does not vary on sales amount. Other expenses are as follows:
cost per unit
direct materials $1,500
direct labor $150
variable overhead $50
variable selling and administrative expense $30
Light power believes sales for 2002 will fall somewhere between 10,000 and 15,000 units.
Q1. Create a flexible proforma income statement for sales of 10,000, 12,500, and 15,000 units.
Q2. Should you subtract out non cash expenses? Why or why not??
Q3. When would a company want to use a flexible budget as opposed to a static budget?? What are the advantages of a flexible budget??