Financial Analysis

Financial Year 2011 effect (Increase by) Financial Year 2012

Sales 200,000 units 30% x 200,000 260,000

Material cost per unit 20% x 180,000 216,000

Direct Labor cost per unit 15% x 80,000 92,000

Variable Indirect Cost per unit 10% x 110,000 121,000

Indirect Fixed cost 5% x 40,000 42,000

Selling expenses 8% x 150,000 162,000

Administrative Expenses 6% x 100,000 106,000

1. Compute the unit sales price at which Blake must sell its product in the current year in order to earn a budgeted target profit of £200,000.

Sales Revenue 1,000,000

Variable Cost x

Contribution Margin (1,000,000 – x)

Fixed Costs 40,000

Net Income 150,000

(1000, 000- x) – 40,000 = 150,000

1,000,000 - x = 190,000

x = 1,000,000 – 190,000

= 810,000

Contribution Margin = 1,000,000 – 810,000 = 190,000

Variable costs = 810,000

Break Even Point = Fixed Expenses / Contribution margin

40,000/190,000 = 0.210 units

At break point

Sales = variable expenses + fixed expenses + profits

260,000x = 121,000x + 40,000 + 200,000

260, 000 x – 121,000x = 240,000

139000x = 240,000

x = 240,000/139,000

x = $1.73 per unit

2. Calculate a value in response to the following: Unhappy about the prospect of a price increase, Blake’s sales manager would like data regarding the number of units that must be sold at the former price to earn the £200,000 profit

The Blake Company will break even the point when the price per unit is 0.210.

Given the desired profit is $ 200,000

Sales – expenses = 200,000

0.210 x – (106,000 + 162,000 + 42,000) = 200,000

0.210 X – 310,000 = 200,000

0.210X = 510,000

X = 2,428 Units

3. Calculate a value in response to the following: Believing that an estimated increase in sales is overly optimistic, a company director is requesting data predicting annual profit if the selling price calculated above is adopted, but the change in sales volume only amounts to a 10% increase

Number units sold 200,000 x 1.73 = $ 345323

Increase in sales by 10% = 110% x 345323 = $ 379,856

Financial and Performance Management

Income Statement

Financial Year 2012

Sales (200,000 units)

$ 379,856

Cost of goods sold

216,000

Gross margin

163856

Selling expenses

£162,000

Administrative expenses

106,000

Net profit (before income taxes)

($104144)

Post your opinion regarding the question of whether the company should pursue price adjustments versus a focus on increased sales. Given the data, would you be in favor of a price increase?

The company should consider adjusting the price because it increases the revenue. Pursuing the increase in sales results into losses as shows above.

References

Atrill, P. &McLaney, E. (2011) Accounting and Finance for Non-Specialists. (7th ed.) Harlow: FT/Prentice Hall.

El-Massri, M. & Harris, E. (2011) Rethinking budgetary slack as budget risk management. Journal of Applied Accounting Research. 12(3) pp.278-293.

Neely, A., Bourne, M. & Adams, C. (2003) Better budgeting or beyond budgeting? Measuring Business Excellence. 7(3) pp.22-28.