Reference no: EM132746629
A local merchant is developing next year's budget, based upon the level of expected sales volume (in units sold). The current year's actual results are as follows.
Sales (100,000 units) $ 500,000
Cost of goods sold - 300,000
Gross margin (aka Gross profit) 200,000
Operating expenses (includes $20,000 of Depreciation) - 120,000
Operating income before tax $80,000
For the upcoming year, selling prices will increase by 8 percent while unit sales volume is expected to decrease by 5 percent. In addition, a new supplier contract will reduce product costs by 2 percent. Other than depreciation (using straight-line method), all costs are variable. Inventories are expected to remain minimal.
Problem 1. Make a budgeted income statement for the upcoming year. Use a gross-margin format (as illustrated above) and ignore income taxes.
Problem 2. Continuing with the requirement #1 facts, briefly describe how you would revise the company's static budget using flexible budgeting.
Problem 3. Now assume that the company's cost of goods sold includes fixed overhead, and is calculated using absorption costing. Compare and contrast gross margin (using absorption costing) to contribution margin (using variable costing).
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