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Budgeted profit, what-if analysis
The Monteiro Manufacturing Corporation manufactures and sells folding
umbrellas. The corporation’s condensed income statement for the year
ended December 31, 2011, follows:
|
Sales (200,000 units)
|
1,000,000
|
|
|
Cost of goods sold
|
600,000
|
|
|
Gross margin
|
400,000
|
|
|
Selling expenses
|
150,000
|
|
|
Administrative expenses
|
100,000
|
250,000
|
|
|
150,000
|
Monteiro’s budget committee has estimated the following changes for 2012:
30% increase in number of units sold
20% increase in material cost per unit
15% increase in direct labor cost per unit
10% increase in variable indirect cost per unit
5% increase in indirect fixed costs
8% increase in selling expenses, arising solely from increased volume
6% increase in administrative expenses, reflecting anticipated higher
wage and supply price levels
Any changes in administrative expenses caused solely by increased sales volume are considered immaterial.
Because inventory quantities remain fairly constant, the budget
committee considered that for budget purposes any change in inventory
valuation can be ignored. The composition of the cost of a unit of
finished product during 2011 for materials, direct labor, and
manufacturing support, respectively, was in the ratio of 3:2:1. In 2011,
$40,000 of manufacturing support was for fixed costs. No changes in
production methods or credit policies were contemplated for 2012.
Required:
(a) Compute the unit sales price at which the Monteiro Manufacturing
Corporation must sell its umbrellas in 2012 in order to earn a budgeted
profit of $200,000.
(b) Unhappy about the prospect of an increase in selling price,
Monteiro’s sales manager wants to know how many units must be sold at
the old price to earn the $200,000 budgeted profit. Compute the number
of units that must be sold at the old price to earn $200,000.
(c) Believing that the estimated increase in sales is overly
optimistic, one of the company’s directors wants to know what annual
profit is likely if the selling price determined in part a is adopted
but the increase in sales volume is only 10%. Compute the budgeted
profit in the case.
