Below are estimates related to Sando's 2022 budget, a company that specializes in crafting unique ornaments for the Caribbean: Selling Price: $2500 Variable Cost per Ornament: $1625 Fixed Annual Cost: $140,000 Net Profit (After Tax): $600,000 Income Tax Rate: 25% Upon reviewing the income statement mid-year, it was evident that sales did not meet the expected levels. For the first half of the year up to June 2022, 360 units were sold at the projected selling price with variable costs aligning with the plan. However, achieving the projected 2022 net profit appears unlikely without management intervention. Several mutually exclusive options have been presented for consideration: a) Option 1: Reduce the selling price by $180. This adjustment would enable the sale of 1700 units for the remainder of the year. Both the budgeted fixed costs and variable costs per unit will remain unchanged. b) Option 2: Lower the variable cost per unit by $60 by sourcing more cost-effective direct materials. Additionally, decrease the selling price by $240, with an expected sales volume of 1900 units for the remaining year. c) Option 3: Reduce fixed costs by $30,000 and decrease the selling price by 7%. Variable costs will remain unaffected, and 1800 units are anticipated to be sold for the remainder of the year. Required: 1) Assume that no changes are made to the selling price or costs, calculate the amount of units that Sando must sell: i) To breakeven. ii) To attain the estimated net profit. 2) Determine the alternative that Sando should select to achieve its Net profit goal. 3) By reference to the above data: How can a company effectively use CPV (Cost-Volume-Profit) analysis to make strategic decisions about its product pricing and production levels? Give 5 or more insightful claims
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
Below are estimates related to Sando's 2022 budget, a company that specializes in crafting unique ornaments for the Caribbean:
Selling Price: $2500
Variable Cost per Ornament: $1625
Fixed Annual Cost: $140,000
Net Profit (After Tax): $600,000
Income Tax Rate: 25%
Upon reviewing the income statement mid-year, it was evident that sales did not meet the expected levels.
For the first half of the year up to June 2022, 360 units were sold at the projected selling price with variable costs aligning with the plan. However, achieving the projected 2022 net profit appears unlikely without management intervention. Several mutually exclusive options have been presented for consideration:
a) Option 1: Reduce the selling price by $180. This adjustment would enable the sale of 1700 units for the remainder of the year. Both the budgeted fixed costs and variable costs per unit will remain unchanged.
b) Option 2: Lower the variable cost per unit by $60 by sourcing more cost-effective direct materials. Additionally, decrease the selling price by $240, with an expected sales volume of 1900 units for the remaining year.
c) Option 3: Reduce fixed costs by $30,000 and decrease the selling price by 7%. Variable costs will remain unaffected, and 1800 units are anticipated to be sold for the remainder of the year.
Required:
1) Assume that no changes are made to the selling price or costs, calculate the amount of units that Sando must sell:
i) To breakeven.
ii) To attain the estimated net profit.
2) Determine the alternative that Sando should select to achieve its Net profit goal.
3) By reference to the above data: How can a company effectively use CPV (Cost-Volume-Profit) analysis to make strategic decisions about its product pricing and production levels? Give 5 or more insightful claims, adquately supported by evidence and make reference to the other questions above
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