McDreamy is in an industry sector which is recovering from the recent recession. The directors of the company hope next year to be operating at 85% of capacity, although currently the company is operating at only 65% of capacity. 65% of capacity represents output of 10,000 units of the single product which is produced and sold. One hundred direct workers are employed on production for 200,000 hours in the current year. The flexed budgets for the current year are as follows. Capacity level 55% 65% 75% 2$ 1,153,800 2,019,150 846,200 1,000,000 1,750,000 650,000 200,000 120,000 3,720,000 Direct materials Direct wages Production overhead Selling and distribution overhead Administration overhead Total costs 1,480,850 596,170 192,310 120,000 3,235,530 703,830 207,690 120,000 4,204,470 Profit in any year is budgeted to be 16%,% of sales. The following percentage increases in costs are expected for next year. Increase % Direct materials 6.0 3.0 Direct wages Variable production overhead Variable selling and distribution overhead Fixed production overhead Fixed selling and distribution overhead 7.0 7.0 10.0 7.5 10.0 Administration overhead Required (a) Prepare for next year a flexible budget statement on the assumption that the company operates at 85% of capacity; your statement should show both contribution and profit. (12 marks) (b) State three problems which may arise from the change in capacity level. (3 marks) (c) Explain what is meant by the principle of controllability. (5 marks)