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$ 3. Trevor sold 5,700 sets in 2025, and its actual operating income was as follows: Trevor Toy Company Income Statement For the Year Ended December 31, 2025 Net Sales Revenue 456,000 Cost of Goods Sold: Variable 39,372 Fixed 17,604 56,976 Gross Profit 399,024 Selling and Administrative Expenses: Variable 9,120 Fixed 66,000 75,120 Operating Income 323,904 Other Income and (Expenses): Interest Expense (300) Income Before Income Taxes 323,604 Income Tax Expense 10,000 Net Income 313,604 Net Income $ 313,604 Prepare a flexible budget performance report through operating income for 2025. Show product costs separately from selling and administrative costs. To simplify the calculations due to sets in beginning inventory having a different cost than those produced and sold in 2025, assume the following product costs: 38,222 Variable Fixed Total Static budget $ 36,656 $ 19,104 $ 55,760 Flexible budget 19,104 57,326 4. What was the effect on Trevor's operating income of selling 100 sets more than the static budget level of sales? 5. What is Trevor's static budget variance for operating income? 6. Explain why the flexible budget performance report provides more useful information to Trevor's managers than the static budget performance report. What insights can Trevor's managers draw from this performance report? Trevor Toy Company Balance Sheet December 31, 2024 Assets Current Assets: Cash $ 15,000 40,000 600 5,000 Accounts Receivable Raw Materials Inventory Finished Goods Inventory Total Current Assets Property, Plant, and Equipment: Equipment Less: Accumulated Depreciation 60,600 199,000 (42,000) 157,000 Total Assets $ 217,600 Liabilities Current Liabilities: Accounts Payable $ 9,000 170,000 Stockholders' Equity Common Stock, no par $ Retained Earnings Total Stockholders' Equity Total Liabilities and Stockholders' Equity 38,600 208,600 $ 217,600 (Unless otherwise noted, assume all of the following events occurred during 2024 and that any balances given are stated as of December 31, 2024.) a. Budgeted sales are 1,100 sets for the first quarter and expected to increase by 200 sets per quarter. Cash sales are expected to be 40% of total sales, with the remaining 60% of sales on account. Sets are budgeted to sell for $80 per set. b. Finished Goods Inventory on December 31, 2024, consists of 200 sets at $25 each. c. Desired ending Finished Goods Inventory is 30% of the next quarter's sales; first quarter sales for 2026 are expected to be 1,900 sets. FIFO inventory costing method is used. d. Raw Materials Inventory on December 31, 2024, consists of 600 pounds. Direct materials requirement is three pounds per set. The cost is $1 per pound. e. Desired ending Raw Materials Inventory is 10% of the next quarter's direct materials needed for production; desired ending inventory for December 31, 2025, is 600 pounds; indirect materials are insignificant and not considered for budgeting purposes. f. Each set requires 0.20 hours of direct labor; direct labor costs average 8 per hour. g. Variable manufacturing overhead is $1.60 per set. h. Fixed manufacturing overhead includes $2,500 per quarter in depreciation and $2,276 per quarter for other costs, such as utilities, insurance, and property taxes. i. Fixed selling and administrative expenses include $13,000 per quarter for salaries; $2,400 per quarter for rent; $600 per quarter for insurance; and $500 per quarter for depreciation. j. Variable selling and administrative expenses include supplies at 2% of sales. k. Capital expenditures include $20,000 for new manufacturing equipment, to be purchased and paid for in the first quarter. I. Cash receipts for sales on account are 60% in the quarter of the sale and 40% in the quarter following the sale; Accounts Receivable balance on December 31, 2024, is expected to be received in the first quarter of 2025; uncollectible accounts are considered insignificant and not considered for budgeting purposes. m. Direct materials purchases are paid 80% in the quarter purchased and 20% in the following quarter; Accounts Payable balance on December 31, 2024, is expected to be paid in the first quarter of 2025. n. Direct labor, manufacturing overhead, and selling and administrative costs are paid in the quarter incurred. o. Income tax expense is projected at $1,500 per quarter and is paid in the quarter incurred. p. Trevor desires to maintain a minimum cash balance of $40,000 and borrows from the local bank as needed in increments of $1,000 at the beginning of the quarter; principal repayments are made at the beginning of the quarter when excess funds are available and in increments of $1,000; interest is 8% per year and paid at the beginning of the quarter based on the amount outstanding from the previous quarter. $ 3. Trevor sold 5,700 sets in 2025, and its actual operating income was as follows: Trevor Toy Company Income Statement For the Year Ended December 31, 2025 Net Sales Revenue 456,000 Cost of Goods Sold: Variable 39,372 Fixed 17,604 56,976 Gross Profit 399,024 Selling and Administrative Expenses: Variable 9,120 Fixed 66,000 75,120 Operating Income 323,904 Other Income and (Expenses): Interest Expense (300) Income Before Income Taxes 323,604 Income Tax Expense 10,000 Net Income 313,604 Net Income $ 313,604 Prepare a flexible budget performance report through operating income for 2025. Show product costs separately from selling and administrative costs. To simplify the calculations due to sets in beginning inventory having a different cost than those produced and sold in 2025, assume the following product costs: 38,222 Variable Fixed Total Static budget $ 36,656 $ 19,104 $ 55,760 Flexible budget 19,104 57,326 4. What was the effect on Trevor's operating income of selling 100 sets more than the static budget level of sales? 5. What is Trevor's static budget variance for operating income? 6. Explain why the flexible budget performance report provides more useful information to Trevor's managers than the static budget performance report. What insights can Trevor's managers draw from this performance report? Trevor Toy Company Balance Sheet December 31, 2024 Assets Current Assets: Cash $ 15,000 40,000 600 5,000 Accounts Receivable Raw Materials Inventory Finished Goods Inventory Total Current Assets Property, Plant, and Equipment: Equipment Less: Accumulated Depreciation 60,600 199,000 (42,000) 157,000 Total Assets $ 217,600 Liabilities Current Liabilities: Accounts Payable $ 9,000 170,000 Stockholders' Equity Common Stock, no par $ Retained Earnings Total Stockholders' Equity Total Liabilities and Stockholders' Equity 38,600 208,600 $ 217,600 (Unless otherwise noted, assume all of the following events occurred during 2024 and that any balances given are stated as of December 31, 2024.) a. Budgeted sales are 1,100 sets for the first quarter and expected to increase by 200 sets per quarter. Cash sales are expected to be 40% of total sales, with the remaining 60% of sales on account. Sets are budgeted to sell for $80 per set. b. Finished Goods Inventory on December 31, 2024, consists of 200 sets at $25 each. c. Desired ending Finished Goods Inventory is 30% of the next quarter's sales; first quarter sales for 2026 are expected to be 1,900 sets. FIFO inventory costing method is used. d. Raw Materials Inventory on December 31, 2024, consists of 600 pounds. Direct materials requirement is three pounds per set. The cost is $1 per pound. e. Desired ending Raw Materials Inventory is 10% of the next quarter's direct materials needed for production; desired ending inventory for December 31, 2025, is 600 pounds; indirect materials are insignificant and not considered for budgeting purposes. f. Each set requires 0.20 hours of direct labor; direct labor costs average 8 per hour. g. Variable manufacturing overhead is $1.60 per set. h. Fixed manufacturing overhead includes $2,500 per quarter in depreciation and $2,276 per quarter for other costs, such as utilities, insurance, and property taxes. i. Fixed selling and administrative expenses include $13,000 per quarter for salaries; $2,400 per quarter for rent; $600 per quarter for insurance; and $500 per quarter for depreciation. j. Variable selling and administrative expenses include supplies at 2% of sales. k. Capital expenditures include $20,000 for new manufacturing equipment, to be purchased and paid for in the first quarter. I. Cash receipts for sales on account are 60% in the quarter of the sale and 40% in the quarter following the sale; Accounts Receivable balance on December 31, 2024, is expected to be received in the first quarter of 2025; uncollectible accounts are considered insignificant and not considered for budgeting purposes. m. Direct materials purchases are paid 80% in the quarter purchased and 20% in the following quarter; Accounts Payable balance on December 31, 2024, is expected to be paid in the first quarter of 2025. n. Direct labor, manufacturing overhead, and selling and administrative costs are paid in the quarter incurred. o. Income tax expense is projected at $1,500 per quarter and is paid in the quarter incurred. p. Trevor desires to maintain a minimum cash balance of $40,000 and borrows from the local bank as needed in increments of $1,000 at the beginning of the quarter; principal repayments are made at the beginning of the quarter when excess funds are available and in increments of $1,000; interest is 8% per year and paid at the beginning of the quarter based on the amount outstanding from the previous quarter