Profit Planning and What-If Analysis As a newly hired management accountant, you have beenasked to prepare a profit plan for the company for which you work. As part of this task, you’ve beenasked to do some what-if analyses. Following is the budgeted information regarding the coming year:[LO 10-5]Number of active policyholders beginning of month 1 100,000Average monthly premium per policy $100.00Monthly midterm cancellation rate 0.50%Policy renewal rate 85.00%Selling price per unit $ 100.00Variable cost per unit 70.00Fixed costs (per year) 1,200,000Required1. What is the breakeven volume, in units and dollars, for the coming year?2. Assume that the goal of the company is to earn a pretax (operating) profit of $300,000 for thecoming year. How many units would the company have to sell to achieve this goal?3. Assume that of the $70 variable cost per unit the labor-cost component is $25. Current negotiations with the employees of the company indicate some uncertainty regarding the labor costcomponent of the variable cost figure presented above. What is the effect on the breakeven pointin units if selling price and fixed costs are as planned, but the labor cost for the coming year is 4%higher than anticipated? What if labor costs are 6% higher than anticipated? What if labor coststurn out to be 8% higher than anticipated? (Show calculations.)4. Assume now that management is convinced that labor costs will be 5% higher than originallyplanned when the budget for the year was put together. What selling price per unit must the company charge to maintain the budgeted ratio of contribution margin to sales? Round your answer to2 decimal places. (Hint: Use the Goal Seek function in Excel to answer this question.)5. Explain the role of what-if analysis in the budgeting process.
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.
Profit Planning and What-If Analysis As a newly hired
asked to prepare a profit plan for the company for which you work. As part of this task, you’ve been
asked to do some what-if analyses. Following is the budgeted information regarding the coming year:
[LO 10-5]
Number of active policyholders beginning of month 1 100,000
Average monthly premium per policy $100.00
Monthly midterm cancellation rate 0.50%
Policy renewal rate 85.00%
Selling price per unit $ 100.00
Variable cost per unit 70.00
Fixed costs (per year) 1,200,000
Required
1. What is the breakeven volume, in units and dollars, for the coming year?
2. Assume that the goal of the company is to earn a pretax (operating) profit of $300,000 for the
coming year. How many units would the company have to sell to achieve this goal?
3. Assume that of the $70 variable cost per unit the labor-cost component is $25. Current negotiations with the employees of the company indicate some uncertainty regarding the labor cost
component of the variable cost figure presented above. What is the effect on the breakeven point
in units if selling price and fixed costs are as planned, but the labor cost for the coming year is 4%
higher than anticipated? What if labor costs are 6% higher than anticipated? What if labor costs
turn out to be 8% higher than anticipated? (Show calculations.)
4. Assume now that management is convinced that labor costs will be 5% higher than originally
planned when the budget for the year was put together. What selling price per unit must the company charge to maintain the budgeted ratio of contribution margin to sales? Round your answer to
2 decimal places. (Hint: Use the Goal Seek function in Excel to answer this question.)
5. Explain the role of what-if analysis in the budgeting process.
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