Mike€™s Bikes makes and sells high-quality replacement gears for mountain bikes. Mike Speedway, controller, is responsible for preparing the master budget and has assembled the following data for 2016.

The direct labour rate includes wages and all employee-related benefits and the employer€™s share of Canada Pension Plan (CPP) and Employment Insurance (EI). Labour-saving machinery will be fully operational by February. Also, as of March 1, the company€™s union contract calls for an increase in direct labour wages that is included in the direct labour rate.

Mike€™s Bikes expects to have 100 gear units in inventory at December 31, 2015, and has a policy of carrying 5% of the following month€™s projected sales in inventory during the first quarter of the year.

Required:

A. Prepare the following budgets for Mike€™s Bikes for the first quarter of 2016. Be sure to show supporting calculations: (1) sales budget, (2) production budget in units, (3) direct materials budget in units and cost, and (4) direct labour budget in hours.

B. Calculate the total budgeted contribution margin for Mike€™s Bikes for the first quarter of 2016. Be sure to show supporting calculations.

C. Assume that due to decreasing gas prices, more people are expected to drive (not bike) during the first quarter of 2016. The revised estimated sales for replacement gear units is 10% lower. Prepare new budgets based on this revised estimate.

D. If the actual sales in January are 750 gears, which budget would you use to evaluate performance? Using a rolling budget approach, what adjustments would you make to the remaining budgets?

E. Discuss at least three behavioural considerations in the profit-planning and budgeting process.

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2016 March February 1,000 2,000 January 800 April 2,400 $25 0.5 Estimated unit sales Sales price per unit Direct labour hours per unit Direct labour hourly rate Direct materials cost per unit $30 0.75 $30 0.5 $25 0.5 $18 $16 $16 $5 $18 $5 $5 $5