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Flexible Budget and Proforma Income statement

Light power manufactures laptops which sell for
$2,500 each. The company has fixed manufacturing
overhead of $4,000,000 per year, of which $1,000,000
is depreciation, a non cash expense. The company's
fixed selling and administrative expense is $3,000,000
per year. Assume taxes are a fixed $1,000,0000, which
does not vary on sales amount. Other expenses are
as follows:

cost per unit
direct materials $1,500
direct labor $150
variable overhead $50
variable selling and administrative expense $30

Light power believes sales for 2002 will fall somewhere
between 10,000 and 15,000 units.

A. Create a flexible proforma income statement for
sales of 10,000, 12,500, and 15,000 units.

B. Should you subtract out non cash expenses?
Why or why not??

C. When would a company want to use a flexible
budget as opposed to a static budget??
What are the advantages of a flexible budget??
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(See attached file for full problem description)

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Pro forma income statement

10000 12500 15000
SALES 25000000 31250000 37500000
LESS VARIABLE COSTS
direct materials $15,000,000 $18,750,000 $22,500,000
direct labor $1,500,000 $1,875,000 $2,250,000
variable overhead $500,000 $625,000 $750,000
variable selling and administrative expense $300,000 $375,000 ...

Solution Summary

This gives step by step explanation of preparation of Flexible budget and proforma income statement. This also provides the benefits of flexible budgets.

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