North South University

Implication of the Mechanics of

Managerial Accounting

Submitted to:

Afrin Rifat (Ani)

Department of Accounting and Finance

Section: 01
Course: ACT 360
Submitted by:
Name ID
Sashwot Kharel 1831755630
Md Naimur Islam Durjoy 1530402630
Md Sumon Miah 1430553030
Rajib Deb Nath 1831523030
Md Mizanur Rahman 1530230030
Mahmudul Hasan 1511375030
Sumon Sikdar 1430414030
15th April, 2020

Afrin Rifat

Senior Lecturer,

Dept. of Accounting & Finance (BBA)

North South University, Dhaka, Bangladesh

Subject: Submission of report on Implications of the mechanics of Managerial Accounting.

Dear Ma’am,

We are hereby submitting the group project which has enabled us get a deeper understanding of
the managerial accounting principles and costing concepts. With this project were able to apply
our theoretical knowledge that we acquired in class to our existing practical environment. For the
completion of the project we used various types of costing techniques including budgeted
costing, future projection of different costing systems, price projections and total budget of our
manufactured product. It is true that without your support, it would have been very difficult for
us to carry out the project work. We are immensely grateful for support and guidance we have
received throughout the semester.

We want to thank you for your support and we are very happy to get the opportunity to work on
this project. We hope that our unwanted errors will be taken with forgiveness.

Sincerely Yours,
Team
Table of contents
1. Background of the Product.............................................................................1

2. Industry Analysis............................................................................................1

3. Manufacturing Process...................................................................................1

4. Monthly Production Quantity.........................................................................1

5.Production Cost.................................................................................................2

5.1...............................................................................................Direct Material
......................................................................................................................2

5.2...................................................................................................Direct Labor
......................................................................................................................2

5.3................................................................................Manufacturing Overhead
......................................................................................................................2

6.Support & Selling Costs....................................................................................2

6.1.................................................................................................Support Costs
......................................................................................................................2

6.2....................................................................................................Selling Cost
......................................................................................................................3

7.Analysis of Cost Behavior.................................................................................3

7.1...............................................................................Fixed and Variable Costs

......................................................................................................................3

7.2................................................................................Direct and Indirect Costs

 ......................................................................................................................3

7.3......................................................................................................Prime Cost
......................................................................................................................3

7.3 Conversion Cost..........................................................................................4

8.Full Cost............................................................................................................4

9.Allocation Bases & Simple Costing System.....................................................4

9.1................................................................................Allocation Bases of Cost

......................................................................................................................4

9.2..................................................Product Cost under Simple Costing System

......................................................................................................................4

10.................................................................................Allocation of Support Cost

5

10.1...................................Allocation of Support Cost under Direct Allocation

5

10.2.................................Allocation of Support Cost under Step-down Method

5

10.3................................Allocation of Support Cost under Reciprocal Method

7

11.......................................................................................Activity Based Costing

8

11.1..............................................Allocation Bases & Cost Effect Relationship

8

11.2.............................................................................................Allocation Rate
 8

11.3..............................................................................Cost per unit as per ABC

9

12...................................................................................Product Line Profitability

10

13..................................................................................................Pricing Strategy
10

14.....................................................................................................Master Budget
11

14.1............................................................................................Revenue Budget
11

14.2........................................................................................Production Budget
11

14.3................................................................................................Usage Budget
11

14.4..................................................................Direct Material Purchase Budget

11

14.5............................................................Direct Manufacturing Labor Budget

12

14.6.................................................................Manufacturing Overhead Budget

12

14.7..............................................................................Ending Inventory Budget

13
 14.8....................................................................Cost per unit of Finished Good
13

14.9.......................................................................................Cost of Goods Sold

13

15.............................................................................Traditional Income Statement

14

15. 1 Traditional Income Statement - Total Basis...........................................14

15............................................2 Traditional Income Statement - Per Unit Basis

14

16.............................................................Contribution Format Income Statement

15

16.1..................................Contribution Format Income Statement - Total Basis

15

16.2.............................Contribution Format Income Statement - Per Unit Basis

16

17................................................................................................Break Even Point

17

18.................................................................................................Margin of Safety
17

19............................................................................................Operating Leverage
18

20.........................................................................Sensitivity Analysis Outcome

....................................................................................................................18
1. Background of the Product

1.1 Introduction

We use pens and pencils every day to help us carry out different tasks, such as doing homework,
drawing a picture, or creating a sketch. Pen holders create a special place to hold those writing
utensils that we never seem to find when we really need them. Popsicle Pen holders are even
better since they are a great way to transform something from being ordinary to extraordinary
and can add a fun, spunky twist to the traditional holder. Our company Vintage Décor has come
into existence to manufacture what we call "Popsicle Pen holder" which we tend sell at a
competitive price while offering customers value for money. With our product people can say
good bye to their messy desk as our product allows our customer to keep their desktop clutter
free and stylish. The holder basically is used as a desk organizer for pen pencils, marker that
makes an individual's workspace more efficient. Therefore our product keeps everything well
organized, which will allow and individual to dress up their desk and office in a simple and
elegant way. Our product is also versatile in terms of its utility as an individual can store their
makeup items, knife scissors keys and even their mobile phones. As our product is introduced in
the market we are optimistic that it will stand out in terms of simplicity and functionality.

1.2 Reason for selecting the product

Our company has decided to manufacture the pencil holder for variety of reasons. The youths of
Bangladesh account for 30% of the entire population, and with the strengthening of the
Bangladesh economy the literacy rate is rapidly increasing every year. This means more people
are attending school every year. With this trend, it allows our company the perfect opportunity to
offer our product to these school goers to better organize themselves while carrying out their
coursework. This allows our company to create employment in Bangladesh as well at the same
time makes it convenient for student to carry out their assignments effectively and achieve higher
grades. Our product is not only limited to students, but rather provides utility to other groups of
individuals as well. Therefore our product can also be used in an office environment or can be
used to arrange makeup item and can also be used as a piece of décor. Another reason our
company decided to go for this product is simply due to the fact that the manufacturing process
is relatively simple. Because the value adding process is not very complicated, it also allows us
to produce the product at a lower cost.
2. Industry Analysis

As of now our company currently operates in the stationery, crafts and gifts industry. Due to the
fact that our product is designed to organize items as well as provide aid to students and as it is
also a handmade product our company will be competing in this industry. With a progressive
economy, and with the surge in the FDI in Bangladesh, more offices are being established,
literacy rate is increasing more people are attending school, therefore increasing the demand for
our product. Currently there are handful of competitors in the industry for now, but is likely that
more businesses will enter this industry as the market is expanding. Our aim right now is to
establish our self in the market so our company will be ready to bear stiff competition in the
future. Aarong, Home & Decor, Enfield, Good luck, are among the few competitors that stand in
the way of our company's profitability and market share prospects.

3. Manufacturing process

The manufacturing process for the pen holder not very complex rather it is simple. It is because
of the simplicity of the value adding process that helps our company to keep our cost low. As a
startup this simplified production process has allowed us to reduce confusion and therefore
maximize efficiency. The product is basically made of up of 3 parts; the base, Pencil holder and
Mobile holder. Our production is designed in such a way that certain groups of people work to
manufacture each item separately and then assemble them together.

The Manufacturing process of the product as follows:

1) Before our production processes start our team makes sure that all necessary items are
available to initiate the value adding process. The arrangements of Popsicle sticks, paper,
glue gun, paint and decorative items are made accordingly.
2) The line workers initially start by articulating the base of the product. First a piece of
paper is taken and then it is cut as per the size needed for the base. After that popsicles
sticks are adjusted with the size of the base to formulate a perimeter. Each Popsicle stick
are placed sequentially one after the other with the help of a glue gun to completely cover

the white spaces. It is also necessary to keep adding Popsicle sticks back of the base to
make it more robust and resilient.

3) After the base is ready, now the workers start to articulate the main part of the product,
i.e. the pencil holder case. Again a rectangular piece of paper is cut out, on top of which
the popsicles are sequentially laid out with the help the glue gun. Unlike the base made
earlier, this time Popsicle sticks are only laid out on the single side of the paper. Then the
ends of the rectangular surface are matched with each other to form a cylindrical
structure, which will therefore fulfil the job of the pencil holder.
4) Next, the workers start structuring the mobile case holder of the product. First two
parallel popsicles are laid out, which are then connected by a single stick to form an in
complete square. Taking this initial design as the framework, other popsicle- sticks are
stacked one after the other on top of each other until the shaped is hallowed. Then the
open ended side is again covered with the sticks after which the structure is completed.

5) At the end all the individual structures are assembled together to form the product as a
whole. The base is laid down and a cushion is added to it. After that on top of the base
then the cylindrical pencil holder case and the mobile case is fixated with the help of the
glue gun.
 6) The final structured , is then painted, decorated and is made ready for shipping

4. Monthly Production Quantity

With our existing resource and available manpower we are able to produce 250 units of our
product every month .We will produce 250 pieces in a month. Our workshop will be open for
22 days, as 7 members work together to manufacture the product.

5. Production Cost

5.1 Direct Material

SL. Direct materials Cost/unit (TK) Unit / month Total cost
1 Popsicle Stick 35 250 8750
2 Paper 2 250 500
3 Total 37 9250

5.2 Direct Labor

 SL. Labor Cost/Day Cost/Unit (Tk.) Units/Month Total Cost (Tk.)
1 285 25 250 6250

5.3 Manufacturing Overhead

SL. MOH Cost/Unit (Tk.) Units/Month Total Cost (Tk.)

1 Glue 8 250 2000
2 Decoration 3 250 750
3 Factory rent 24 250 6000
4 Electricity Bill 3 250 750
5 Factory Maintenance 4 250 1000
Total 42 - 10500

6. Support & Selling Costs

6.1 Support Costs

SL. Support Costs Cost/Unit (Tk.) Units/Month Total Cost (Tk.)

1 Internet & Telephone 1.6 250 400
2 Designing 0.80 250 200
Department
Total 2.40 - 600

6.2 Selling Costs

SL. Selling Costs Cost/Unit (Tk.) Units/Month Total Cost (Tk.)

1 Delivery cost 1.5 250 375
2 Packaging Cost 2.5 250 625
 3 Advertising Cost 2.5 250 625
4 Administrative Cost 3.5 250 875
Total 10.00 - 2500

7. Analysis of Cost Behavior

7.1 Fixed and Variable Costs

The table below shows the fixed and variable cost.

Fixed Cost Variable Cost

Factory Rent Paper
Internet & Telephone Packaging
Designing Department Glue
Factory Maintance Popsicle Stick
Administrative Cost Decoration
Advertising Cost Electricity Cost
Delivery cost

7.2 Direct and Indirect Costs

The table below shows the indirect and direct cost.

Indirect Costs Direct Costs

Glue Popsicle Stick
Decoration
Electricity Cost Paper
Delivery cost
Packing cost
Advertising cost
Factory Rent
 Factory Maintance
Administrative cost

7.3 Prime Cost

SL. Prime Cost Head Cost/Unit (Tk.)

1 Direct Material 37
2 Direct Labor 25
Total 62
7.4 Conversion Cost

SL. Prime Cost Head Cost/Unit (Tk.)

1 Direct Labor 25
2 Manufacturing Overhead 45
Total 67

8. Full Cost

SL Full Cost Cost/Unit (Tk.)

1 Total Direct Material 37
2 Direct Labor 25
3 Manufacturing Overhead 42
4 Selling Cost 10
5 Support Cost 2.40
Total 116.40

9. Allocation Bases & Simple Costing System

9.1 Allocation Bases of Cost

SL Cost Allocation Base

1. MOH No. of Units Produced
2. Direct Material No. of Units Produced
3. Direct Labor No. of Units Produced
9.2 Product Cost under Simple Costing System

SL. Costs Cost/Unit (Tk.)

1 Direct Materials 37
2 Direct Labor 25
3 MOH (Indirect Cost) 42
Total Cost Per Unit 104

10. Allocation of Support Cost

SL. Support Costs Cost/Unit (Tk.) Units/Month Total Cost (Tk.)

1 Internet & Telephone 1.6 250 400
2 Designing 0.80 250 200
Department
Total 2.40 - 600

Details Support Departments Operating Departments Total

Internet & Designing

zTelephone Department Manufacturing Selling
Budgeted Overhead
Costs before any cost 400 200 26600 2500 29100
Support work supplied
by Internet & telephone - 10% 50% 40% 100%
Support work supplied
by Designing Department 10% - 30% 60% 100%

For the successful operation of the business our company has been partitioned into 4 functional
departments which includes; Internet & Telephone, Designing, Manufacturing and Selling
Department. Our company has identified Internet & Telephone and Designing Department as
support department as they tend to provide additional support for the smooth running of the other
two departments. While in the other hand we have classified Manufacturing and Selling
Department as operational department as they are directly involved in producing and selling the
product. In this report we have used all the 3 methods to allocate our Support Cost. But we
believe the adoption of the step down method will be more appropriate for our business. This is
due to the fact that Internet and Telephone department provides service to all the other
department, while the Designing Department only provides service to the Manufacturing and the
Selling department. In terms of practicality Designing Department does not contribute much to
the Internet & Telephone department.

10.1 Allocation of Support Cost under Direct Allocation

Support Operating Department Total

Department
Internet & Designing Manufacturing Sales
Telephone Department
Cost Incurred 400 200 600
Allocation of (400) 222 178 0
Internet Bill
Allocation of (200) 67 133 0
Designing
Department

Total allocation 0 0 289 311 600

10.2 Allocation of Support Cost under Step-down Method

Support Department Operating Department Total

Internet & Designing Manufacturing Sales
Telephone Department
Cost Incurred 400 200 600
Allocation of (400) 40 200 160 0
Internet bill
New Total 240
Allocation of (240) 80 160 0
Designing
Department
Total 0 0 280 320 600

10.3 Allocation of Support Cost under Reciprocal Method

Support Department Operating Department

Internet & Designing Maintenance Sales Total
Telephone Department
Cost Incurred 400 200 --- --- 600
1st Allocation (400) 40 200 160
of
Internet Bill
1st Allocation 24 (240) 72 144
of
Telephone Bill
2nd Allocation (24) 2 12 10
of
Internet Bill
2nd Allocation 0 (2) 1 1
of
Telephone Bill
Supporting --- --- 285 315
cost allocated
to operating 600
cost
11. Activity Based Costing
11.1 Allocation Bases & Cost Effect Relationship

The table below shows the allocation bases along with their cost-effect relationship.

SL. Cost Allocation Cause Effect Relationship

Base
1 Factory Rent No. of shifts Factory cost is allocated based on
number of shifts use
in production.
2 Popsicle Stick No. of units The more the products the more matches needed.
produced
3 Glue No. of units The more the products the more glue needed.
produced
4 Decoration No. of units The more the products the more decoration
produced needed.
5 Paper No. of units The more the products the more paper needed.
produced
6 Internet & No. of using The more the hours the more the cost
Telephone hours
7 Designing No. of design The more the design hours the more the cost
Department hour
8 Advertising No. of units The more the products the more advertising
produced needed.
9 Packaging No. of units
produced The more the products the more packaging cost.

Electricity Bill No. of units

10 produced The more the products the more electricity cost.
Factory Maintance
No. of units
11 The more the products the more factory
produced
maintaince cost
Delivery Cost No. of units The more the products the more delivery cost
12
produced
 Administrative Cost No. of units
produced The more the products the more administrative
13 cost

11.2 Allocation Rate

SL Activity Budgeted Cost Cost driver Budgeted Allocation

(Tk.) allocation rate
base(unit) Tk/Unit
1 Popsicle Stick 8750 No. of shifts 11.36*22=250 35
2 Paper 500 No. of units produced 250 2
3 Glue 2000 No. of units produced 250 8
4 Decoration 750 No. of units produced 250 3
5 Factory Rent 6000 No. of units produced 250 24
6 Internet & 400 No. of units produced 250 1.60
Telephone

7 Designing 200 No. of units produced 250 0.80

Department
8 Advertising 625 No. of units produced 250 2.5
9 Packaging 625 No. of units produced 250 2.5
10 Electricity Bill 750 No. of units produced 250 3
11 Factory Maintance 1000 No. of units produced 250 4

12 375 No. of units produced 250 1.5

Delivery Cost

13 875 No. of units produced 250 3.5

Administrative
Cost
11.3 Cost per unit as per ABC

Direct Costs : Value (Taka)

Direct Material 37
Direct Labor 25
Indirect Cost
Factory Rent 24
Glue 8
Decoration 3
Electricity Bill 3

Factory Maintance 4
Internet & telephone 1.60
Designing Department 0.80
Delivery cost 1.5
Advertising cost 2.5
Packaging cost 2.5
Administrative cost 3.5
Total Cost Per Unit (Taka) 116.40

12. Product Line Profitability

Our selling price is Tk. 170 per unit. Our revenue will be 170*250 = Tk. 42,500

Under simple costing method

Particular Unit Per unit (Taka) Total(Tk.)

Sales Revenue 250 170 42,500
Less: Costs
Direct Material 250 37 9250
Direct labor 250 25 6250
MOH 250 42 10500
Operating Income 16,500

Under activity based costing method

 Cost Item Per unit (Taka) Total
Sales Revenue 42500
Less: Costs
Direct Material 9250
Direct Labor 6250
Indirect Costs
Factory Rent 6000
Glue 2000
Decoration 750
Electricity Bill 750
Factory Maintance 1000
Internet & Telephone 400
Designing 200
Department
Delevary Cost 375
Advertising cost 625
Packaging cost 625
Administrative Cost 875
Total Cost 29100
Total Operating 13400
Income

The profit is more under activity-based costing is less than simple costing because cost
of support and selling department are not present in simple costing system.

14. Pricing Strategy

 Our company basically follows a cost based pricing strategy. In order to determine the
price of our product we add profit element to our cost base. We have added 46% markup
to our cost base to determine our retail price Here we have also made the decision to set
our cost base to full cost, so that every cost incurred is taken into account. One of the
reasons we chose this approach is due its simplicity. Mark-up pricing is a relatively simple
and a straight forward approach, which has made its execution easier. With this approach
we can also be confident that our selling price is able to cover our cost as well as bring us
our target profit. When deciding the price of our product, our company has made an effort
to realize just a considerable amount of profit so our price are competitive in the market.
As this is important for us to increase our customer base, in order to increase our
survivability prospects.

Retail price = Cost base (full cost) + Mark-up (46%)

TK 170 = 116.40 + 53.6

Vintage Crafts Aarong Home & Decor Enfield

Popscile penholder Wooden pen holder Plastic penholder Wooden penholder
- TK 170 - TK 355.770 -TK 300

-TK 225

If we compare our prices with that of our competitors, it is evident that our prices are more
competitive. While determining our mark-up element we were very cautious. We have set the
markup in such a way that it is competitive enough to attract new customers and significant
enough to earn us a decent amount of profit. As we are new to the business we have also adopted
a penetrating pricing strategy in which has allowed us to enter the market with a relatively low
price, which we will increase gradually in the future when we acquire sufficient market share.

14. Master Budget

14.1 Revenue Budget

Product Units Selling Price Per Unit (Taka) Total Revenue

Popsicle stick 250 170 42500

14.2 Production Budget

Units to be sold 250

Add: Target ending inventory 250
Total needs 500
Less: Beginning Inventory 0
Units to be produced 500

14.3 Usage Budget

Physical Usage Budget

Units Required Manufactured Quantity Total
Popsicle Stick 3.7 500 1850

14.4 Direct Material Purchase Budget

Popsicle stick Total

Direct Material to be used 1885
Add: Ending Inventory Materials 150
Total DM to be Purchased 2000
Less: Beginning DM inventory 0
Total Purchase 2000
Cost 10
Popsicle Stick (2000*10) 20000
Total (Taka) 20000 20000

14.5 Direct Manufacturing Labor Budget

 Unit Hour per Decor Total hour Wage per hour (Taka) Total
Popsicle 500 2.5 1250 35 43750
Stick

14.6 Manufacturing Overhead Budget

Manufacturing Overhead Total

Factory Rent 6000
Glue 2000
Decoration 750
750
Electricity Bill

Factory Maintance 1000

Total 7500

14.7 Ending Inventory Budget

Direct Material Ending Units Cost per unit TOTAL

Popsicle Stick 150 10 1500
Finished goods 250 170 42500
Total cost of ending inventory 44000

14.8 Cost per unit of Finished Good

Budgeted MOH rate 42

(10500/250)
 Budgeted MOH Cost 42
(42*1)
Direct Material Cost per unit of input (Taka) Input per unit TOTAL

Popsicle Stick 10 3.7 37

Direct Labor 10 2.5 DLH 25
MOH 42 1 42
Total manufacturing Cost Per shelf 104

14.9 Cost of Goods Sold

Amount (Taka) Total

Beginning finished goods inventory 0
Add: Cost of goods manufactured
Cost of direct material used 11000
Direct labor cost 24500
MOH Cost 10500
Goods available for sale: 46500
Less: Ending Finished goods inventory 44000
Cost of goods sold 2500

15. Traditional Income Statement

15. 1 Traditional Income Statement - Total Basis

Budgeted Income Statement (Total

Basis) For the Month Ended 31st March,
2020

Amount Total (Taka)

Revenue 42500
Less: Cost of Goods Sold (2500)
Gross Profit 40000
Less: Operating Expense
Factory Rent 6000
Electricity Bill 750
Factory Maintance 1000
Internet & Telephone 400
Designing Unit 200
 Delivering Cost 375
Advertising Cost 625
Packaging 625
Administrative Cost 875
Total operating Expense 10850
Net profit 29150

15.2 Traditional Income Statement - Per Unit Basis

Budgeted Income Statement (Per Unit

Basis) For the Month Ended 31st March,
2020

Amount Total (Taka)

Revenue 170
Less: Cost of Goods Sold 10
Gross Profit 160
Less: Operating Expense
Factory Rent 24
Electricity Bill 3
Factory maintaince 4
Internet & Telephone 1.60
Designing Unit 0.80
Delivery Cost 1.5
Advertising cost 2.5
Packaging 2.5
Administrative Cost 3.5
Total operating Expense 43.4
Net profit 116.6

16. Contribution Format Income Statement

16.1 Contribution Format Income Statement - Total Basis

Budgeted Income Statement (Total

Basis) For the Month Ended 31st March,
2020
 Amount Total (Taka)
Revenue 42500
Less: Variable Cost
Paper 500
Glue 2000
Decoration 750
Electricity Cost 750
Delivery Cost 375
Packaging Cost 625
Popsicle Stick 8750
Total Variable Cost 13750
Contribution Margin 28750
Less: Fixed Cost
Factory Rent 6000
Factory Maintaince 1000
Administrative Cost 875
Internet & Telephone 400
Designing dept. 200
Advertising cost 625
Total Fixed Cost (9100)
Net Income 19650

16.2 Contribution Format Income Statement - Per Unit Basis

Budgeted Income Statement (Per Unit

Basis) For the Month Ended 31st March,
2020

Amount Total (Taka)

Revenue 170
Less: Variable Cost
Paper 2
Glue 8
 Decoration 3
Electricity Cost 3
Delivery Cost 1.5
Packaging Cost 2.5
Popsicle Stick 35

Total Variable Cost 55

Contribution Margin 115
Less: Fixed Cost
Factory Rent 24
Factory Maintance 4
Administrative Cost 3.5
Internet & Telephone 1.60
Designing dept. 0.80
Advertising cost 2.5
Total Fixed Cost 36.4
Net Income 78.6

17 . Break Even Point

Break Even Sales (in units) = Fixed Cost/Contribution Margin per unit

=9100/115

= 79.13units = 80 units

Break Even Revenue = Break even sales (in units) * Selling price

=80units*170 Taka = TK 13600

Our company has to sell 80 units of our product or have to hit the sales target of TK13600, for
our Revenue to be equal with our cost. Therefore in order to survive in the market our company
has to at least sell 80 units or Tk 13600 worth of Popsicle penholder.

18. Margin of Safety

Budgeted Sale =250 units * 170 Taka

= 42500

Taka Break Even Sale = 13600 Taka

= Budgeted sales –Breakeven revenue

= (42500 – 13600 ) = 28900

Percentage of margin of safety= (Margin of safety /Budgeted revenues)*100

= (28900 /42500)*100 = 68%

Our margin of safety is at 68%. As the number is relatively large it is evident that we will face
less risk. This number indicates that in order for our company to make loss our sales must
drop by more than 68% or else we will still be making profit.

19. Operating Leverage

Degree of operating leverage= Contribution Margin /Net Operating Income

= 28750/ 19650

= 1.46 Times

This variable indicates that if there is a 1% change in our sales revenue then our contribution
margin will result in 1.82 % change in operating income. While in the other hand, if the sales
revenue of our company decreases by 1% then both contribution margin, and our net operating
income will decrease by 1.82%. Therefore operating leverage it a perfect metric to measure the
sensitivity of our contribution margin to a change in sales revenue.

20. Sensitivity Analysis Outcome

Our company has done sensitivity analysis taking two scenarios into consideration.
Here we will evaluate the effect on our Sales, Cost, and Net income if,

 There is an 25% increase in the demand of our product - First Scenario

 There is an 25% decrease in our demand for our product - Second Scenario

First Scenario
25% increase in demand will result in, increase in unit.
New Unit: 250 + (250 x 25%)
=250 + 63 = 313 units

If the demand of the product increases by 25%, then our net income will also increase by
(1.46*25%) 36.5 %.

Proof,

Title Budgeted New Change

Revenue 42500 53210 +10710 +25%
Variable Cost (13750) (17215) +3465 +25%
Contribution Margin 28750 35995 +7245 +36.5%
Fixed cost (9100) (9100) 0
Operating Income 19650 26895 +7245 +36.5%
Second Scenario
25% decrease in demand will result in decrease in unit.
New Unit: 250 - (250 x 15%) = 187 units

If the demand of the product decreases by 25%, then our net income will also decrease by
(1.46*25%) 36.5 %.

Proof,

Title Budgeted New Change

Revenue 42500 31790 -10710 -25 %
Variable Cost (13750) (10285) -3465 -25%
Contribution Margin 28750 21250 -7245 -36.5%
Fixed cost (9100) (9100) 0
Operating Income 19650 12405 -7245 -36.5%