Questions and Answers on Managerial Accounting

1
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
2
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.