(a) What are the differences between a fixed budget and a flexible budget? In what ways are fixed budgets and flexible budgets useful for planning and control?

(b) In its budgets for the period ahead, a company is considering two possible sales forecasts for its three products:

Variable costs per unit are expected to be the same at the different levels of possible sales. The variable costs per unit are as follows:

Fixed overheads are expected to total £150,000. These are expected to be unaffected by the possible changes in activity which are being considered. Due to recent high labour turnover and problems of recruitment, direct labour will be restricted to a maximum of £135,000 in the period. It can be assumed that all labour is of the same grade and is freely transferable between products. Other resources are expected to be generally available.
Required:
Take each of the possible sales forecasts in turn.
(i) For each forecast, calculate the sales budget that you would recommend to maximize profits, (ii) What profit would you expect from each sales budget?

In order to answer these questions you must assume that the three products must be sold either all at the higher prices or all at the lower prices.

Product A Product B Product C (i) Sales units 22,000 Selling price per unit 10.00 40,000 6,000 6.00 7.50 (ii) Sales units 30,000 50,000 7,000 Selling price per unit 9.00 5.70 7.10