Canton Company Estimates Sales of 12,000 Units for the Upcoming

question 37

Essay

Canton Company estimates sales of 12,000 units for the upcoming period.At this sales volume its budgeted income is as follows:
$\begin{array}{lrr}&\text { Per Unit } &12.000 \text { Units }\\\text { Sales } & \$ 30 & \$ 360,000 \\\text { Less variable costs: } & & \\\text { Manufacturing costs } & 16 & 192,000 \\\text { Selling and administrative costs } & \underline{ 8} & \underline{96,000}\\\text { Contribution margin } & \$ 6 & \$ 72,000 \\\text { Less fixed costs: } & & \\\text { Manufacturing costs } & & 20,000 \\\text { Selling and administrative costs } & & \underline{ 45,000} \\\text { Net income } && \underline{\$ 7,000}\end{array}$ During the period the company actually produced and sold 14,000 units.
Required:
1)The manager now wants to evaluate the company's performance by comparing actual costs and revenues to those shown above,but you have advised against it.Explain your reasoning.
2)Prepare a flexible budget based on 14,000 units.
3)If management compares actual revenues and costs to the appropriate flexible budget,will they be able to fully understand what went right and what went wrong with the operation during the period? Why or why not?

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Definitions:

Investment Error

Mistakes made in the process of investing capital, which can range from calculation errors to misunderstanding an investment's risks.

Capital Balance

The Capital Balance represents the amount of money that owners have invested in a business minus any withdrawals. It indicates the financial stake of the owners in the business.

Profits and Losses

Financial gains or deficits that a business experiences, typically shown in an income statement.

Invests

Invests pertains to the act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit.