Flex Electronics manufactures and sells two types of custom USB flash drives with organization logo: USB drive #1 and USB drive #2. The company forecasts the following data for year 2017:
|
|
USB Drive #1
|
USB Drive #2
|
|
Direct Materials
|
$3/unit
|
$2/unit
|
|
Direct Labor
|
$4/unit
|
$3/unit
|
|
Setups
|
240
|
80
|
|
Pounds of materials
|
36,000
|
12,000
|
|
Machine hours
|
2,400
|
800
|
|
Selling & administrative expense
|
$1.5/unit
|
$1/unit
|
|
Number of units completed
|
120,000
|
40,000
|
| Selling price |
$14/unit |
$10/unit |
Flex has determined the following activity cost pools and cost driver levels for 2017:
|
Activity Cost Pool
|
Activity Cost
|
Activity Cost Driver
|
|
Machine setup
|
$96,000
|
320 setups
|
|
Material handling
|
$88,000
|
48,000 pounds
|
|
Machine operation
|
$12,800
|
3,200 machine hours
|
|
Total
|
$196,800
|
|
Assume income tax rate is 30%.
Required (1): prepare a budgeted income statement for year 2017 based on the above information.
Flex Electronics also considers three alternative plans to improve its companywide profit:
Plan A: Terminate production of USB drive #2. Given the current plant conditions, Flex can use the excess capacity to produce and sell additional 40,000 units of USB drive #1. This proposed plan does not change activity cost. Termination of USB drive #2 will impose order cancellation penalty of $38,000.
Plan B: Lower the selling price of USB drive #1 to $13.5, which will increase the sales volume of USB drive #1 by 20,000 units. Assume Plan B does not affect the production and sale of USB drive #2. Further, activity cost pools and cost driver levels are presented below under this proposed plan:
|
Activity Cost Pool
|
Activity Cost
|
Activity Cost Driver
|
|
Machine setup
|
$108,000
|
360 setups
|
|
Material handling
|
$99,000
|
54,000 pounds
|
|
Machine operation
|
$14,400
|
3,600 machine hours
|
|
Total
|
$221,400
|
|
Plan C: Shifting the focus of advertising from USB drive #2 to USB drive #1, which will increase advertising costs by $5000. Further, plan C will increase the sales volume of USB drive #1 by 10,000
units, and decrease the sales volume of USB drive #2 by 10,000 units. Assume this proposed plan does not change activity cost pools and cost driver levels.
Required (2): Prepare a budgeted income statement for each of the above three alternative plans and identify the plan that has the most beneficial effect on Flex's companywide profit.