# Refer to the information in the previous problem for Essex Fuel Pumps. Pleased with the initial budget,

## Question:

Refer to the information in the previous problem for Essex Fuel Pumps. Pleased with the initial budget, the CEO of Essex Fuel Pumps, Claire Balderson, distributes the document to the production, planning, and purchasing managers to seek their inputs and to help them gear up for the coming year. Both the production and planning managers were concerned. “Look, Claire, our maximum capacity is 120,000 pumps, and we can perhaps stretch it to make 125,000 pumps. There is no way we can make 150,000 pumps without additional investment. We need to increase our capacity by at least 25,000 pumps to be able to make the budget. This means that we have to buy some equipment and invest in human resources. For your convenience, I am giving you an estimate of what it would cost to increase capacity. But, before you decide to expand capacity, we need to make sure that we are not responding to a temporary surge in demand. What would we do with this additional capacity if the demand were to recede to normal levels the following year?” Pierre Grosjean, the planning manager, wanted to know. The following table summarizes the additional capacity costs that would need to be incurred to increase Essex’s capacity to 150,000 fuel pumps.
Increase in plant maintenance $225,000 Increase in plant depreciation$125,000
Increase in plant administration $100,000 Increase in marketing administration$40,000
Increase in plant supervision \$75,000

Required:
a. Assume that demand is likely to continue at the level of 150,000 pumps over the next several years and that unit variable costs stay the same as estimated in the previous problem. Prepare a revised budgeted income statement for 2009 after incorporating the additional fixed cost estimates.
b. What would budgeted income be if Claire decides not to incur the additional capacity costs but, rather, decides to produce the maximum number of fuel pumps (i.e., 125,000 fuel pumps) with existing capacity?
c. Is it more profitable for Essex to increase capacity to 150,000 units or decrease production to 125,000 units?

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Related Book For

## Managerial accounting

ISBN: 978-0471467854

1st edition

Authors: ramji balakrishnan, k. s i varamakrishnan, Geoffrey b. sprin

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