Appliance Possible Inc. (AP) is a manufacturer of toaster ovens. To improve control over operations, the president of AP wants to begin using a flexible budgeting system, rather than use only the current master budget. The following data are available for AP’s expected costs at production levels of 80,000, 92,000, and 104,000 units.

Variable costs

Manufacturing $7 per unit
Administrative $4 per unit
Selling $2 per unit

Fixed costs
Manufacturing $146,000
Administrative $ 79,000

Required:

a. Prepare a flexible budget for each of the possible production levels: 90,000, 105,000, and 120,000 units.
b. If AP sells the toaster ovens for $18 each, how many units will it have to sell to make a profit of $309,000 before taxes?

a) The flexible budget is the budgetary control tool that is prepared by the organizations having different levels of production but the variable cost per unit and the total fixed cost are always constant.

b) The units sold are 106,800 for attaining a profit of $309,000.

a) The flexible budget for each of the production levels is prepared in the image attached below.

b) The number of units sold to attain the profit limit of $309,000 is determined by taking the break-even formula.

It is computed as follows:

Given,

selling price= $18

targeted profit= $309,000

fixed cost= $225,000

variable cost= $13

To know more about the flexible budget, refer to the link:

Appliance Possible Inc. (AP)

a) Flexible Budgets for productions level:

i) Production level of 90,000 units:

Unit variable cost = $13 $(7+4+2)

Total Variable Costs = 90,000 x $13 = $1,170,000

Fixed Costs = $225,000

Total Costs = $1,395,000

ii) Production level of 105,000 units:

Total Variable costs = 105,000 x $13 = $1,365,000

Fixed Costs = $225,000

Total Costs = $1,590,000

iii) Production level of 120,000 units:

Total Variable costs = 120,000 x $13 = $1,560,000

Fixed Costs = $225,000

Total Costs = $1,785,000

b) If AP sells the toaster ovens for $18 each, to make a profit of $309,000 before taxes, units to be sold are:

Break-even Point + Target Profit =  (Fixed Cost + Target Profit)/Contribution per unit

Contribution per unit = $18 - $13 = $5

= ($225,000 + $309,000)/ $5

= $534,000/$5

= 106,800 units

Explanation:

a) A flexible budget tries to change the level of output.  It is a technique used to assess performance under different volumes or activities.  It helps management to make the right decisions, given the fact that different levels of activity may call for different cost and revenue reflections.

b) To make a target profit, the fixed cost is added to the target profit and divided by the unit contribution.  This produces the number of units to be sold in order to achieve the target profit.

c) Contribution is the difference between the selling value and the variable costs.  It is the element that covers fixed costs and generates profit before taxes.

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