Concept explainers
Sensitivity Analysis
Sanjana’s Sweet Shoppe operates on the boardwalk of a New England coastal town. The store only opens for the summer season and the business is heavily dependent on the weather and the economy in addition to new competition. Sanjana Sweet, the owner, prepares a budget each year after reading long-term weather
Sanjana assumes, for simplicity, that the gross margin and the estimated number of customers are independent. Thus, she has nine possible scenarios. In addition to the cost of the products sold, Sanjana estimates staffing costs to be $25,000 plus $2 for every customer in excess of 20,000. The marketing and administrative costs are estimated to be $10,000 plus 3 percent of the gross margin.
Required
Use a spreadsheet to prepare an analysis of the possible operating income for Sanjana similar to that in Exhibit 13.15. What is the range of operating incomes?
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Fundamentals Of Cost Accounting (6th Edition)
- Ethical Behavior Consider the following scenario between Dave, a printer, and Steve, an assistant in the local universitys athletic department. Steve: Dave, our department needs to have 10,000 posters printed for the basketball team for next year. Heres the mock-up, and well need them in a month. How much will you charge? Dave: Well, given the costs I have for ink and paper, 1 can come in at around 5,000. Steve: Great, heres what I want you to do. Print me up an invoice for 7,500. Huts our budget. Then, when they pay you, you give me a check for 2,500. Ill make sure that you get the job. Required: CONCEPTUAL CONNECTION Is Steves proposal ethical? What should Dave do?arrow_forwardFriendly Bank is attempting to determine the cost behavior of its small business lending operations. One of the major activities is the application activity. Two possible activity drivers have been mentioned: application hours (number of hours to complete the application) and number of applications. The bank controller has accumulated the following data for the setup activity: Required: 1. Estimate a regression equation with application hours as the activity driver and the only independent variable. If the bank forecasts 2,600 application hours for the next month, what will be the budgeted application cost? 2. Estimate a regression equation with number of applications as the activity driver and the only independent variable. If the bank forecasts 80 applications for the next month, what will be the budgeted application cost? 3. Which of the two regression equations do you think does a better job of predicting application costs? Explain. 4. Run a multiple regression to determine the cost equation using both activity drivers. What are the budgeted application costs for 2,600 application hours and 80 applications?arrow_forwardDorothy Koehl recently leased space in the Southside Mall and opened a new business, Koehl’s Doll Shop. Business has been good, but Koehl frequently runs out of cash. This has necessitated late payment on certain orders, which is beginning to cause a problem with suppliers. Koehl plans to borrow from the bank to have cash ready as needed, but first she needs a forecast of how much she should borrow. Accordingly, she has asked you to prepare a cash budget for the critical period around Christmas, when needs will be especially high. Sales are made on a cash basis only. Koehl’s purchases must be paid for during the following month. Koehl pays herself a salary of $4,800 per month, and the rent is $2,000 per month. In addition, she must make a tax payment of $12,000 in December. The current cash on hand (on December 1) is $400, but Koehl has agreed to maintain an average bank balance of $6,000—this is her target cash balance. (Disregard the amount in the cash register, which is insignificant because Koehl keeps only a small amount on hand in order to lessen the chances of robbery.) The estimated sales and purchases for December, January, and February are shown in the following table. Purchases during November amounted to $140,000. Prepare a cash budget for December, January, and February. Suppose that Koehl starts selling on a credit basis on December 1, giving customers 30 days to pay. All customers accept these terms, and all other facts in the problem are unchanged. What would the company’s loan requirements be at the end of December in this case? (Hint: The calculations required to answer this part are minimal.)arrow_forward
- Information for Budgeting, Ethics Norton Company, a manufacturer of infant furniture and carriages, is in the initial stages of preparing the annual budget for the coming year. Scott Ford has recently joined Norton’s account-ing staff and is interested in learning as much as possible about the company’s budgeting process. During a recent lunch with Marge Atkins, sales manager, and Pete Granger, productionmanager, Ford initiated the following conversation.FORD: “Since I’m new around here and am going to be involved with the preparation of the annual budget, I’d be interested in learning how the two of you estimate sales and productionnumbers.”ATKINS: “We start out very methodically by looking at recent history, discussing what we know about current accounts, potential customers, and the general state of consumer spending.Then, we add that usual dose of intuition to come up with the best forecast we can.”GRANGER: “I usually take the sales projections as the basis for my projections. Of…arrow_forwardProblem 1 Glidden Company manufactures a line of chocolate bars that are sold in various department and grocery stores. The company’s controller has just received the sales forecast for the coming year for Glidden Company’s three products which are the High Protein, High Sugar and No Sugar chocolate bars. Glidden has experienced large fluctuations in sales volumes and variable costs over the past two years and the controller believes the sales forecast should be carefully evaluated from a CVP perspective. Preliminary budget information for 2023 is as follows: High Sugar High Protein No Sugar Unit sales 100,000 100,000 200,000 Unit selling price $ 48 $ 56 $ 68 Variable manufacturing cost per unit $ 11 $ 10 $ 21 Variable selling cost per unit $ 7 $ 6 $ 10 For 2023, Glidden’s fixed factory overhead is budgeted at $ 2,000,000 and the company’s fixed, selling and administrative expenses are forecasted to be $ 600,000. Glidden’s income tax rate is 40%. Required: (Show all calculations.…arrow_forwardThe management team at Nash Corporation is capitalizing on the trend for live-edge cedar fireplace mantels—beautiful, simple, organic. In fact, sales are so strong they are running out of inventory. This means that budgeting for next year will be extremely important, to ensure sure that Nash can source enough cedar.With budgeted sales as the starting point for the entire process, the management team agrees that the following levels present the most likely scenario for the first five months of the upcoming year. January February March April May Budgeted number of mantels to be sold 380 420 430 410 460 In addition to sales volume, many other specifics are required in order to complete the company’s operating budgets. Key details associated with prices, costs, and usage are as follows. ● Budgeted selling price is $500 per mantel. Each mantel measures 3 inches × 12 inches × 4 feet. ● Target ending inventory of finished mantels is 20% of…arrow_forward
- Dorothy Koehl recently leased space in the Southside Mall and opened a new business, Koehl's Doll Shop. Business has been good, but Koehl frequently runs out of cash. This has necessitated late payment on certain orders, which is beginning to cause a problem with suppliers. Koehl plans to borrow from the bank to have cash ready as needed, but first she needs a forecast of how much she should borrow. Accordingly, she has asked you to prepare a cash budget for the critical period around Christmas, when needs will be especially high. Sales are made on a cash basis only. Koehl's purchases must be paid for during the following month. Koehl pays herself a salary of $4,800 per month, and the rent is $2,200 per month. In addition, she must make a tax payment of $13,000 in December. The current cash on hand (on December 1) is $700, but Koehl has agreed to maintain an average bank balance of $5,000 - this is her target cash balance. (Disregard the amount in the cash register, which is…arrow_forwardCASH BUDGETING Helen Bowers, owner of Helens Fashion Designs, is planning to request a line of credit from her bank. She has estimated the following sales forecasts for the firm for parts of 2019 and 2020: Estimates regarding payments obtained from the credit department are as follows: collected within the month of sale, 10%; collected the month following the sale, 75%; collected the second month following the sale, 15%. Payments for labor and raw materials are made the month after these services were provided. Here are the estimated costs of labor plus raw materials: General and administrative salaries are approximately 27,000 a month. Lease payments under long-term leases are 9,000 a month. Depreciation charges are 36,000 a month. Miscellaneous expenses are 2,700 a month. Income tax payments of 63,000 are due in September and December. A progress payment of 180,000 on a new design studio must be paid in October. Cash on hand on July 1 will be 132,000, and a minimum cash balance of 90,000 should be maintained throughout the cash budget period. a. Prepare a monthly cash budget for the last 6 months of 2019. b. Prepare monthly estimates of the required financing or excess fundsthat is, the amount of money Bowers will need to borrow or will have available to invest. c. Now suppose receipts from sales come in uniformly during the month (that is, cash receipts come in at the rate of 1/30 each day), but all outflows must be paid on the 5th. Will this affect the cash budget? That is, will the cash budget you prepared be valid under these assumptions? If not, what could be done to make a valid estimate of the peak financing requirements? No calculations are required, although if you prefer, you can use calculations to illustrate the effects. d. Bowers sales are seasonal, and her company produces on a seasonal basis, just ahead of sales. Without making any calculations, discuss how the companys current and debt ratios would vary during the year if all financial requirements were met with short-term bank loans. Could changes in these ratios affect the firms ability to obtain bank credit? Explain.arrow_forwardNorton Company, a manufacturer of infant furniture and carriages, is in the initial stages of preparing the annual budget for the coming year. Scott Ford has recently joined Nortons accounting staff and is interested in learning as much as possible about the companys budgeting process. During a recent lunch with Marge Atkins, sales manager, and Pete Granger, production manager, Ford initiated the following conversation. FORD: Since Im new around here and am going to be involved with the preparation of the annual budget, Id be interested in learning how the two of you estimate sales and production numbers. ATKINS: We start out very methodically by looking at recent history, discussing what we know about current accounts, potential customers, and the general state of consumer spending. Then, we add that usual dose of intuition to come up with the best forecast we can. GRANGER: I usually take the sales projections as the basis for my projections. Of course, we have to make an estimate of what this years closing inventories will be, which is sometimes difficult. FORD: Why does that present a problem? There must have been an estimate of closing inventories in the budget for the current year. GRANGER: Those numbers arent always reliable since Marge makes some adjustments to the sales numbers before passing them on to me. FORD: What kind of adjustments? ATKINS: Well, we dont want to fall short of the sales projections so we generally give ourselves a little breathing room by lowering the initial sales projection anywhere from 5 to 10 percent. GRANGER: So, you can see why this years budget is not a very reliable starting point. We always have to adjust the projected production rates as the year progresses, and of course, this changes the ending inventory estimates. By the way, we make similar adjustments to expenses by adding at least 10 percent to the estimates; I think everyone around here does the same thing. Required: 1. Marge Atkins and Pete Granger have described the use of budgetary slack. a. Explain why Atkins and Granger behave in this manner, and describe the benefits they expect to realize from the use of budgetary slack. b. Explain how the use of budgetary slack can adversely affect Atkins and Granger. 2. As a management accountant, Scott Ford believes that the behavior described by Marge Atkins and Pete Granger may be unethical and that he may have an obligation not to support this behavior. By citing the specific standards of competence, confidentiality, integrity, and/or credibility from the Statement of Ethical Professional Practice (in Chapter 1), explain why the use of budgetary slack may be unethical. (CMA adapted)arrow_forward
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