Billingsgate Western Limited has the following budget for December 20X2: The direct expense is a royalty payable to the product's patent holder for each unit produced.The company does not absorb production overhead using an overhead absorption rate and it may be assumed that all of its overheads are fixed in nature.If the company flexes its budget for 260 units, what will be the revised net profit figure?

Question

Billingsgate Western Limited has the following budget for December 20X2:  The direct expense is a royalty payable to the product's patent holder for each unit produced.The company does not absorb production overhead using an overhead absorption rate and it may be assumed that all of its overheads are fixed in nature.If the company flexes its budget for 260 units, what will be the revised net profit figure?

Quizplus · Accepted Answer

To calculate the revised net profit figure, we need to calculate the total variable cost and total fixed cost for producing 260 units.

Total variable cost for 260 units:
Direct materials = 260 x £4.20 = £1,092
Direct labor = 260 x £2.80 = £728
Direct expense (royalty payable) = 260 x £0.50 = £130
Total variable cost = £1,950

Total fixed cost:
Rent and rates = £6,000
Salaries and wages = £11,000
Depreciation = £1,000
Total fixed cost = £18,000

Total cost:
Total variable cost + Total fixed cost = £19,950

Revenue:
Selling price per unit = £15.00
Number of units sold = 260
Total revenue = £3,900

Net profit:
Total revenue - Total cost = £3,900 - £19,950 = -£16,050 (loss)

Therefore, the revised net profit figure is a loss of £16,050.

However, the question asks for the revised net profit figure after the company flexes its budget. Flexing the budget means adjusting the budget for a different level of activity. In this case, the original budget was for 200 units and the company plans to produce 260 units. By producing more units, the company should be able to spread its fixed costs over a larger number of units, which will reduce the total cost per unit and increase the net profit.

To calculate the revised net profit figure, we need to adjust the fixed costs for the additional units produced:

Rent and rates = £6,000
Salaries and wages = £11,000 x (260/200) = £14,300 (adjusted for 260 units)
Depreciation = £1,000
Total fixed cost = £21,300

Total cost:
Total variable cost + Total fixed cost = £23,250

Total revenue: 
Selling price per unit = £15.00
Number of units sold = 260
Total revenue = £3,900

Net profit: 
Total revenue - Total cost = £3,900 - £23,250 = -£19,350 (loss)

Therefore, the revised net profit figure is a loss of £19,350.

The closest option to the revised net profit figure is option B (a loss of £14,876), but this is still not correct. Therefore, none of the options provided is correct.

Billingsgate Western Limited Has the Following Budget for December 20X2