STATIC & FLEXIBLE BUDGETING PROBLEM #1ACCT 2102

The Clark Company operates several shoe stores in the Dallas metropolitan area. The controller's department has performed a detail cost analysis and determined that the company's costs have the following behavior patterns:

Item BehaviorPatterns Cost Formulas For Budgeting

Cost of Shoes (average) Variable $90 per unitRent Fixed $340,000 per yearTelephone Fixed $15,000 per yearCommissions Variable 6% of salesInsurance Fixed $8,000 per yearMaintenance & Cleaning Fixed $27,000 per year

Salaries Step-Fixed $140,000 base amount*Supplies Semi-variable $6,000 + $0.30 per unit

*If the stores surpass 20,000 units per year in sales, the company's salaries expense will increase $30,000. This increase will occur at each additional increment ("jump") in sales of 10,000 units.

The department also estimated that the company would sell its shoes at an average price of $120 per unit during 1999 and that it would sell 46,000 pairs of shoes during the year.

Required: Determine expected sales, expenses and profits at the following sales levels:

Item 27,000 Units 35,000 Units 45,000 Units

Sales

Cost of Goods Sold

Gross Profit

Rent

Telephone

Commissions

Insurance

Maintenance & Cleaning

Salaries

Supplies

Total Operating Expenses

Income Before Taxes

Budgeted Sales & Profits At Various Sales LevelsClark Company - Problem #1

Item 27,000 35,000 45,000Units Units Units

Sales $3,240,000 $4,200,000 $5,400,000

Cost of Goods Sold 2,430,000 3,150,000 4,050,000

Gross Profit 810,000 1,050,000 1,350,000

Rent 340,000 340,000 340,000

Telephone 15,000 15,000 15,000

Commissions 194,400 252,000 324,000

Insurance 8,000 8,000 8,000

Maintenance & Cleaning 27,000 27,000 27,000

Salaries 170,000 200,000 230,000

Supplies 14,100 16,500 19,500

Total Operating Expenses 768,500 858,500 963,500

Income Before Taxes $41,500 $191,500 $386,500

Explanation of CalculationsAll Figures For 35,000 Units

Sales 35,000 units x $120 per unit = $4,200,000

Cost of Goods Sold 35,000 units x $90 per unit = $3,150,000

Gross Profit Sales - Cost of Goods Sold = $1,050,000

Rent Rent is a fixed cost = $340,000 at all levels of sales

Telephone Telephone is a fixed cost = $15,000 at all levels of sales.

Commissions $4,200,000 x 6% = $252,000

Insurance Insurance is a fixed cost = $8,000 at all levels of sales.

Maintenance & Cleaning Maintenance is a fixed cost = $27,000 at all levels of sales.

Salaries Salaries is a step-fixed cost = $140,000 + $30,000 x 2 = $200,000 (includes two cost increments of $30,000each due to two "jumps" of 10,000 units)

Supplies Supplies are a semi-variable cost = $6,000 + $0.30 x 35,000 units = $16,500.

Total Operating Expenses Sum of all operating expenses = $858,500

Income Before Taxes Gross Profit - Total Operating Expenses = $191,500