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Expected sales 2,000 units of le 25, variable cost/unit, le15, fixed costs to 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
b(ii)

Le 25,000\textbf{Le } 25,000

b(iii)

Le 25,000\textbf{Le } 25,000

Step-by-step solution

8 steps

Here's the solution to question b):

Part b(i)· 3 steps

Prepare a budgeted income statement.

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

  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\text{Total Sales Revenue} = 2,000 \text{ units} \times \text{Le } 25/\text{unit} Total Sales Revenue=Le 50,000\text{Total Sales Revenue} = \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\text{Total Variable Costs} = 2,000 \text{ units} \times \text{Le } 15/\text{unit} Total Variable Costs=Le 30,000\text{Total Variable Costs} = \text{Le } 30,000

  3. Prepare the Budgeted Income Statement.

    Budgeted Income Statement\textbf{Budgeted Income Statement} Sales RevenueLe 50,000Less: Variable Costs(Le 30,000)‾Contribution MarginLe 20,000Less: Fixed Costs(Le 10,000)‾Net ProfitLe 10,000‾‾\begin{align*} \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 Profit} && \underline{\underline{\textbf{Le } 10,000}} \end{align*}

Part b(ii)

Le 25,000\textbf{Le } 25,000

Calculate the break-even sales value.

  1. Calculate Contribution per unit.

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

  2. Calculate Break-even point in units.

    Break-even point (units)=Fixed CostsContribution per unit\text{Break-even point (units)} = \frac{\text{Fixed Costs}}{\text{Contribution per unit}} Break-even point (units)=Le 10,000Le 10/unit\text{Break-even point (units)} = \frac{\text{Le } 10,000}{\text{Le } 10/\text{unit}} Break-even point (units)=1,000 units\text{Break-even point (units)} = 1,000 \text{ units}

  3. Calculate Break-even sales value.

    Break-even sales value=Break-even point (units)×Selling price per unit\text{Break-even sales value} = \text{Break-even point (units)} \times \text{Selling price per unit} Break-even sales value=1,000 units×Le 25/unit\text{Break-even sales value} = 1,000 \text{ units} \times \text{Le } 25/\text{unit} Break-even sales value=Le 25,000\text{Break-even sales value} = \boxed{\textbf{Le } 25,000}

Part b(iii)

Le 25,000\textbf{Le } 25,000

Calculate the margin of safety.

  1. Calculate Actual Sales Value.

    Actual Sales Value=Expected Sales (units)×Selling price per unit\text{Actual Sales Value} = \text{Expected Sales (units)} \times \text{Selling price per unit} Actual Sales Value=2,000 units×Le 25/unit\text{Actual Sales Value} = 2,000 \text{ units} \times \text{Le } 25/\text{unit} Actual Sales Value=Le 50,000\text{Actual Sales Value} = \text{Le } 50,000

  2. Calculate Margin of Safety in value.

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

Part b(iv)

Explain the importance of budgeting in planning.

Budgeting is crucial in planning because it provides a financial roadmap for an organization, translating strategic goals into specific, measurable financial targets. It helps in resource allocation, ensuring that funds are directed towards achieving objectives efficiently, and serves as a control mechanism to monitor performance against planned activities.

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