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Expected sales 2,000 units @ 25, Variable Cost/Unit @ 15, Fixed Costs @ 10,000. i) Prepare a budgeted Income Statement ii) What is the break-even Sales Value? iii) Calculate the Margin of Safety iv) Explain the importance of budgeting in planning.

Business/Management

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2 parts
ii

Le 25,000\textbf{Le } 25,000

iii

Le 25,000\textbf{Le } 25,000

Step-by-step solution

8 steps

Here's the solution to question 8.b):

Given:
Expected Sales = 2,000 units
Selling Price per unit = Le 25
Variable Cost per unit = Le 15
Fixed Costs = Le 10,000

Part i· 3 steps

Prepare a budgeted Income Statement.

  1. Calculate Total Sales Revenue.

    Total Sales Revenue=Expected Sales Units×Selling Price per unit\text{Total Sales Revenue} = \text{Expected Sales Units} \times \text{Selling Price per unit} Total Sales Revenue=2,000 units×Le 25/unit=Le 50,000\text{Total Sales Revenue} = 2,000 \text{ units} \times \text{Le } 25/\text{unit} = \text{Le } 50,000

  2. Calculate Total Variable Costs.

    Total Variable Costs=Expected Sales Units×Variable Cost per unit\text{Total Variable Costs} = \text{Expected Sales Units} \times \text{Variable Cost per unit} Total Variable Costs=2,000 units×Le 15/unit=Le 30,000\text{Total Variable Costs} = 2,000 \text{ units} \times \text{Le } 15/\text{unit} = \text{Le } 30,000

  3. Prepare the Budgeted Income Statement.

    Budgeted Income Statement\textbf{Budgeted Income Statement} Sales RevenueLe 50,000Less: Variable CostsLe 30,000‾Contribution MarginLe 20,000Less: Fixed CostsLe 10,000‾Net Income (Profit)Le 10,000‾‾\begin{array}{l r} \text{Sales Revenue} & \text{Le } 50,000 \\ \text{Less: Variable Costs} & \underline{\text{Le } 30,000} \\ \text{Contribution Margin} & \text{Le } 20,000 \\ \text{Less: Fixed Costs} & \underline{\text{Le } 10,000} \\ \text{Net Income (Profit)} & \underline{\underline{\textbf{Le } 10,000}} \\ \end{array}

Part ii

Le 25,000\textbf{Le } 25,000

What is the break-even Sales Value?

  1. Calculate the Contribution Margin per unit.

    Contribution Margin per unit=Selling Price per unit−Variable Cost per unit\text{Contribution Margin per unit} = \text{Selling Price per unit} - \text{Variable Cost per unit} Contribution Margin per unit=Le 25−Le 15=Le 10/unit\text{Contribution Margin per unit} = \text{Le } 25 - \text{Le } 15 = \text{Le } 10/\text{unit}

  2. Calculate the Contribution Margin Ratio.

    Contribution Margin Ratio=Contribution Margin per unitSelling Price per unit\text{Contribution Margin Ratio} = \frac{\text{Contribution Margin per unit}}{\text{Selling Price per unit}} Contribution Margin Ratio=Le 10Le 25=0.40 or 40%\text{Contribution Margin Ratio} = \frac{\text{Le } 10}{\text{Le } 25} = 0.40 \text{ or } 40\%

  3. Calculate the Break-even Sales Value.

    Break-even Sales Value=Fixed CostsContribution Margin Ratio\text{Break-even Sales Value} = \frac{\text{Fixed Costs}}{\text{Contribution Margin Ratio}} Break-even Sales Value=Le 10,0000.40=Le 25,000\text{Break-even Sales Value} = \frac{\text{Le } 10,000}{0.40} = \boxed{\textbf{Le } 25,000}

Part iii

Le 25,000\textbf{Le } 25,000

Calculate the Margin of Safety.

  1. Identify Actual Sales Value and Break-even Sales Value.

    Actual Sales Value (from part i) = Le 50,000
    Break-even Sales Value (from part ii) = Le 25,000

  2. Calculate the Margin of Safety.

    Margin of Safety=Actual Sales Value−Break-even Sales Value\text{Margin of Safety} = \text{Actual Sales Value} - \text{Break-even Sales Value} Margin of Safety=Le 50,000−Le 25,000=Le 25,000\text{Margin of Safety} = \text{Le } 50,000 - \text{Le } 25,000 = \boxed{\textbf{Le } 25,000}

Part iv

Identify and explain the importance of budgeting in planning.

  1. Provides Direction and Coordination: Budgeting sets clear financial goals and targets for the organization, acting as a roadmap. It helps to coordinate the activities of various departments, ensuring that all efforts are aligned towards achieving the overall strategic objectives.
  2. Facilitates Performance Evaluation: Budgets serve as a benchmark against which actual financial performance can be measured. By comparing actual results to budgeted figures, management can identify variances, analyze their causes, and take corrective actions to improve efficiency and effectiveness.
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