In October 2020, Herman Nater, President, and Marlene Bier, Controller, of Lemmein Security USA were checking the budgeted figures for Lemmein's 2021 operations. Lemmein's parent company in Germany had established a target pre-tax profit for Lemmein of $210,000 for the upcoming year. Nater and Bier wanted to make sure they could meet that target.

THE COMPANY

In early 2020, Lemmein Security, a large German manufacturer of radio equipment, had set up a subsidiary in the United States to manufacture two products Lemmein had successfully marketed in Europe. One was a miniature signaling device used primarily for remote operation of garage doors. These "R1" units consisted of a signal sender, about half the size of a pack of cards, and a receiver, which was a bit larger. They contained a high-security chip which gave them an advantage over almost all the other units in the marketplace. A large manufacturer of motorized garage doors had agreed to take a minimum of 100,000 R1 control units a year. Nater and Bier thought that 120,000 units was a reasonable target for 2021 from this customer.

Lemmein also had designed a similar device that could be used by a householder to turn on inside lights when arriving after dark. This unit, called "R2," was slightly more expensive to make since the receiving part was a complete plug-in device, while the R1 receiver was a component of the garage door unit. Initially, Lemmein expected to sell the R2 unit primarily through mail-order catalogues. Nater and Bier projected sales of 60,000 of these units for 2021.

THE BUDGET FOR 2021

Looking at the budget, Bier observed, "I'm relieved to see that our projection results in a budgeted profit that exceeds the target of $210,000 profit for next year expected by the parent company." "Me, too," replied Nater. "But we're budgeting a monthly profit of $20,000, so we don't have a large margin for error. I think we should look at a few things. What if sales of both products decline by 5% (500 units of R1 and 250 units of R2)

First, what's our manufacturing cost per unit and profit each month if we produce and sell 9,500 R1s and 4,750 R2s?

Second, what's our profit if each month we only sell 9,500 R1s and 4,750 R2s, but we produce 10,000 R1 and 5,000 R2s, assuming the unsold units go into finished goods inventory?"

Bier hurried off to do her analysis. To start, she pulled out the budgeted figures shown in Exhibit 1. She recognized that the budget was only approximate since she expected that changes would be made to improve efficiency and perhaps the product design. But she thought the numbers were solid enough for her to use in her analysis of what was necessary to reach the parent company's target profit. In preparing her analysis, she decided to assume that parts (i.e., direct materials), direct labor, and supplies could be considered variable with units produced, and all the rest would be fixed within the time frame and volume range being considered.

Exhibit 1 LEMMEIN SECURITY, INC. (A) 2021 Monthly Budget
	R1	R2	Total
Sales Revenue
Produce and sell per month	10,000 units	5,000 units
Projected selling price	$ 20.00	$ 23.00
Sales revenue	$200,000	$115,000	$315,000
Manufacturing Costs
Parts (Direct materials)	$55,000	$32,000	$87,000
Direct labor	35,000	21,000	56,000
Overhead (a)	70,000	42,000	112,000
Total manufacturing cost	$160,000	$95,000	$255,000
Manufacturing cost per unit	16.00	19.00
Selling and administrative			40,000
Total expense			295,000
Profit before tax			$20,000

(a) Manufacturing overhead:

Supplies	$21,000
Occupancy (utilities, rent, maintenance)	15,000
Equipment maintenance	17,000
Equipment depreciation	8,000
Quality control and production engineering	15,000
Manufacturing administration	36,000
Total manufacturing overhead	$112,0O0

In this budget, overhead was allocated to the two products on the basis of direct labor estimated for the two products: $2.00 of overhead for each $1.00 of direct labor.

 

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E25 D E F. G H. 17 18 19 RESULTS (OUTPUT) AREA; 20 MONTHLY BUDGET 21 SALES (UNITS) R1 R2 TOTAL 22 23 SALES FORMULAS - 24 MANUFACURING COSTS: 25 PARTS (DIRECT MATERIALS) * USE ONE FORMULA PER ROW/COLUMN. THIS IS WHERE ABSOLUTE, RELATIVE, MIXED REFERENCING IS USED (COPY/PASTE) * REFERENCING SHOULD BE TO LEFT & 26 DIRECT LABOR 27 VARIABLE OVERHEAD 28 FIXED OVERHEAD ABOVE, SIMILAR TO READING A BOOK; 29 TOTAL MANUFACTURING COSTS HENCE THE BASIC SETUP 30 31 SELLING & ADMINISTRATIVE 32 TOTAL EXPENSE 33 34 PROFIT BEFORE TAX (MONTHLY) SINCE YOU ARE ANALYZING DIFFERENT SCENARIOS 35 (EXPLAINING WHY THEY ARE DIFFERENT), YOU NEED TO EITHER (1) COPY/PASTE-VALUES ON THIS WORKSHEET OR A SEPARATE WORKSHEET, AND/OR (2) COPY THEM IN A TABLE IN A WORD FILE. THIS 36 PROFIT BEFORE TAX (ANNUAL) 37 38 39 ALLOWS SIDE x SIDE COMPARISONS. 40 Sheet1 E25 D E F. G H. 17 18 19 RESULTS (OUTPUT) AREA; 20 MONTHLY BUDGET 21 SALES (UNITS) R1 R2 TOTAL 22 23 SALES FORMULAS - 24 MANUFACURING COSTS: 25 PARTS (DIRECT MATERIALS) * USE ONE FORMULA PER ROW/COLUMN. THIS IS WHERE ABSOLUTE, RELATIVE, MIXED REFERENCING IS USED (COPY/PASTE) * REFERENCING SHOULD BE TO LEFT & 26 DIRECT LABOR 27 VARIABLE OVERHEAD 28 FIXED OVERHEAD ABOVE, SIMILAR TO READING A BOOK; 29 TOTAL MANUFACTURING COSTS HENCE THE BASIC SETUP 30 31 SELLING & ADMINISTRATIVE 32 TOTAL EXPENSE 33 34 PROFIT BEFORE TAX (MONTHLY) SINCE YOU ARE ANALYZING DIFFERENT SCENARIOS 35 (EXPLAINING WHY THEY ARE DIFFERENT), YOU NEED TO EITHER (1) COPY/PASTE-VALUES ON THIS WORKSHEET OR A SEPARATE WORKSHEET, AND/OR (2) COPY THEM IN A TABLE IN A WORD FILE. THIS 36 PROFIT BEFORE TAX (ANNUAL) 37 38 39 ALLOWS SIDE x SIDE COMPARISONS. 40 Sheet1