Question

As part of the process of preparing the master budget for the coming year, you’ve been asked to perform what-if analyses, in the form of scenarios, on the original planning assumptions regarding Product A produced by your company. The following are the baseline planning data for the coming year for this product:

Sales volume (annual, in units)		2,500
Selling price per unit	$	1,500
Variable cost per unit	$	1,000
Fixed costs (per year)	$	200,000

Required:

1. Based on the baseline planning data, what is the budgeted operating income for Product A for the coming year?

2. Determine the estimated operating income under each of the following scenarios (for each scenario you should report both the new budgeted operating income and the percentage change in operating income from the baseline budgeted result):

a. Selling price per unit is 10% higher than planned, while fixed costs per year are also 10% higher than planned.

b. Variable cost per unit is 5% higher than planned, while fixed costs are lower by this same percentage.

c. Selling price per unit is 10% higher than planned, while volume is decreased by 8%.

i.e. What is the baseline operating income, budgeted operating income, $ difference from operating income, and % change form operating income for scenarios a,b,& c.

Answer 1

1.

Sales	3,750,000.00
Variable cost	2,500,000.00
Contribution Margin	1,250,000.00
Fixed cost	200,000.00
Budgeted Operating Income	1,050,000.00

2a)

Sales	4,125,000.00
Variable cost	2,500,000.00
Contribution Margin	1,625,000.00
Fixed cost	220,000.00
Budgeted Operating Income	1,405,000.00
Baseline Budgeted Operating income	1,050,000.00
Increase	355,000.00
% change	33.81%

2b)

Sales	3,750,000.00
Variable cost	2,625,000.00
Contribution Margin	1,125,000.00
Fixed cost	190,000.00
Budgeted Operating Income	935,000.00
Baseline Budgeted Operating income	1,050,000.00
Decrease	-     115,000.00
% change	-10.95%

2c)

Sales	3,795,000.00
Variable cost	2,500,000.00
Contribution Margin	1,295,000.00
Fixed cost	200,000.00
Budgeted Operating Income	1,095,000.00
Baseline Budgeted Operating income	1,050,000.00
Decrease	45,000.00
% change	4.29%