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Chapter 22: Q37E (page 1239)

Using sensitivity analysis Rucker Company prepared the following budgeted income statement for 2019:

Requirements

1. Prepare a budgeted income statement with columns for 700 units, 1,300 units, and 1,700 units sold.

2. How might managers use this type of budgeted income statement?

3. How might spreadsheet software such as Excel assist in this type of analysis?

Short Answer

Expert verified

The operating income at 700 units, 1,300 units, and $1,700 units is $126,000, $234,000, and $306,000 respectively.

Step by step solution

01

Preparation of budgeted income statement

RUCKER COMPANY

Budgeted Income Statement

For the year ended December 31, 2019

700 Units

1,300 Units

1,700 Units

Sales revenue ($400 per unit)

$280,000

$520,000

$680,000

LESS: Cost of goods sold (45% of sales)

$126,000

$234,000

$306,000

Gross profit

$154,000

$286,000

$374,000

LESS: Selling and Administrative Expenses (10% of sales)

$28,000

$52,000

$68,000

Operating Income

$126,000

$234,000

$306,000

02

How managers use this type of budgeted income statement

Managers use flexible budget for the sensitivity analysis. They analyze different level of sales to know at which level the company will earn maximum profit.

03

Use of spreadsheet software in sensitivity analysis

Companies prepare master budget using spreadsheet software. These software help in preparing what if budgets within few keystrokes that can be used for sensitivity analysis

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Most popular questions from this chapter

11. Kendall Company projects 2019 first quarter sales to be $10,000 and increase by 5% per quarter. Determine the projected sales for 2019 by quarter and in total. Round answers to the nearest dollar.

12. Friedman Company manufactures and sells bicycles. A popular model is the XC. The company expects to sell 1,500 XCs in 2018 and 1,800 XCs in 2019. At the beginning of 2018, Friedman has 350 XCs in Finished Goods Inventory and desires to have 10% of the next year’s sales available at the end of the year. How many XCs will Friedman need to produce in 2018?

Preparing a financial budget

This problem continues the Piedmont Computer Company situation from Chapter 21. Assume Piedmont Computer began January with \(15,000 cash. Management forecasts that cash receipts from credit customers will be \)48,000 in January and \(51,000 in February. Projected cash payments include equipment purchases (\)20,000 in January and \(41,000 in February) and selling and administrative expenses (\)2,000 each month).

Piedmont Computer Company’s bank requires a \(26,000 minimum balance in the firm’s checking account. At the end of any month when the account balance falls below \)26,000, the bank automatically extends credit to the firm in multiples of \(5,000. Piedmont Computer Company borrows as little as possible and pays back loans each month in \)1,000 increments, plus 12% interest on the entire unpaid principal. The first payment occurs one month after the loan.

Requirements

1. Prepare Piedmont Computer Company’s cash budget for January and February 2020.

2. How much cash will Piedmont Computer Company borrow in February if cash receipts from customers that month total \(41,000 instead of \)51,000?

Connor Company began operations on January 1 and has projected the following selling and administrative expenses:

Rent Expense $ 1,000 per month, paid as incurred

Utilities Expense 500 per month, paid in month after incurred

Depreciation Expense 300 per month

Insurance Expense 100 per month, 6 months prepaid on January 1

Determine the cash payments for selling and administrative expenses for the first three months of operations.

Question: List the four budgeting objectives.

How is benchmarking beneficial?
See all solutions

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