Cost Management: A Strategic Emphasis 7th Edition by Edward Blocher,David Stout ,Paul Juras,Gary Cokins

Exercise 30

Profit Planning and What-If Analysis As a newly hired management accountant, you have been 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:

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 two 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.