III.

Budgeting
Nitwell Industrial Gas Company supplies acetylene and other compressed gases to
industry: Data regarding the store’s operation follow:
 Sales are budgeted at 390,000 for November, 370,000 for December, and
380,000 for January.
 Collections are expected to 90% in the month of sale, 5% in the month following
the sale, and 5% uncollectible
 The cost of goods sold is 60% of sales
 The company purchases 70% of its merchandise in the month prior to the month
of sale 30% in the month of sale. Payment for merchandise is made in the month
following the purchase.
 Other monthly expenses to be paid in cash are 21,800
 Monthly depreciation is 18,000
 Ignore taxes

Statement of Financial Position

October 31
Assets
Cash 25,000
Accounts receivable (net allowance for
Uncollectible accounts) 71,000
Inventory 163,000
Property, plant and equipment (net of
504,000 accumulated depreciation 1,088,000
Total Assets 1,347,800
Liabilities and Stockholders’ Equity
Accounts payable 232,000
Common stock 700,000
Retained earnings 415,800
Total Liabilities and stockholder’s equity 1,347,800
Required:

a. Prepare a Schedule of Expected Cash Collections for November and December.

November December January

Sales 390,000 370,000 380,000
Expected Cash Collection
Beginning Accounts Receivable 71,000
November Sales
(390,000 x 90%) 351,000
(390,000 x 5%) 19,500
December Sales
(370,000 x 90%)   333,000
Total Cash Collection 422,000 352,500

b. Prepare a Merchandise Purchase Budget for November and December.

November December
Cost of Goods Sold (60% of sales) 234,000 222,000
Merchandise Purchase Budget
November purchases
(234,000 x 30%) 70,200
December Purchases
(222,000 x 70%) 155,400
(222,000 x 30%) 66,600
January Purchases
(228,000 x 70%)   159,600
Total Purchases 225,600 226,200

Merchandise Disbursement 232,000 225,600

c. Prepare a Cash Budget for November and December.

November December
Cash Receipts 422,000 352,500
Less: Merchandise Disbursement 232,000 225,600
Other expenses 21,800 21,800
Total Disbursements 253,800 247,400
Excess (Deficiency) of cash
over disbursement 168,200 105,100
d. Prepare Budgeted Income Statements for November and December.

November December
Sales 390,000 370,000
Less: Bad debt expenses 19,500 18,500
Net Sales 370,500 351,500
Less: Cost of Goods Sold 234,000 222,000
Gross Margin 136,500 129,500
Less: Other Expenses 21,800 21,800
Depreciation exp 18,000 18,000
Net Income 96,700 89,700

Mr. Ador Estoria, the operations manager of Achos Merchandising Corp. is worried
about the result of its operation this year. Although the accounting dept. has not
submitted the financial statements yet, the following data where already available
pertaining to year 2020.

Total number of units sold at P50 per unit price 120,000 units

Total fixed costs and expenses P1, 800,000

Variable cost rate 60%

Because of other pressing problems, he hired you to give him information and
computation that will help him plan for the next year operation. He specifically wants the
following (with proofs, if possible):

% Number of units Per unit Amount

Sales 100% 120,000 50 6,000,000
Less:Variable cost 60% 120,000 30 3,600,000
Contribution Margin 40% 120,000 20 2,400,000
Less: Fixed Cost 1,800,000
Operating income 600,000

a. Break-even point in peso sales and in units

Break-even point in peso = Fixed cost/CM ratio
= 1,800,000/40%
= 4,500,000
Proof:
Sales 4,500,000
Less: Variable costs (4.5M x 60%) 2,700,000
Contribution Margin 1,800,000
Less: Fixed costs 1,800,000
Net Operating Income -

Break-even point in units = Fixed cost/CM per unit

= 1,800,000/20
= 90,000 units
Proof:
Sales (90,000 x 50) 4,500,000
Less: Variable costs (90,000 x 30) 2,700,000
Contribution margin (90,000 x 20) 1,800,000
Less: Fixed cost 1,800,000
Operating Income -

b. The margin of safety in peso, in units and in percentage

Peso Units Percentage
Expected Sales 6,000,000 120,000 100%
Break even sales 4,500,000 90,000 75%
Margin of safety 1,500,000 30,000 25%

c. If the profit this year will be doubled next year, how much sales should be realized?
Target Profit = Fixed Cost + desired Profit/CM ratio
= 1,800,000 + (600,000 x 2)/40%
= 1,800,000 + 1,200,000/40%
= 7,500,000
Proof:
Sales 7,500,000
Less: Variable cost (7.5M x 60%) 4,500,000
Contribution margin (7.5M x 40%) 3,000,000
Less: Fixed costs (1,800,000)
Operating Income 1,200,000

d. If the number of units sold next year, exceeds the break-even point by 50,000 units,
what is result of the operation?
Solution: 50,000 x 20 =1,000,000

50,000 units + 90,000 = 140,000 units

Sales (140,000 x 50) 7,000,000

Less: Variable costs (140,000 x 30) 4,200,000
Contribution margin (140,000 x 20) 2,800,000
Less: Fixed costs 1,800,000
Operating Income 1,000,000
e. If management projects a profit of P1,200,000 after the 25% tax, how many units
should be sold?

Target profit in units = Fixed costs + (Desired Profit/1-tax rate)

CM per unit
= 1,800,000 + (1,200,000/75%)
20
= 1,800,000 + 1,600,000/20
= 3,400,000/20
= 170,000 units
Proof:
Sales (170,000 x 50) 8,500,000
Less: variable costs (170,000 x 30) 5,100,000
Contribution margin (170,000 x 20) 3,400,000
Less Fixed costs 1,800,000
Income before tax 1,600,000
Less: Tax (1.6M x 25%) 400,000
Income after tax 1,200,000

f. If the total peso sales generated next year is short by P1million in order to break-even,
what is the result of the operation?

Solution: 1,000,000 x 40% = 400,000 loss

(4,500,000 – 1,000,000 = 3,500,000)

Sales 3,500,000
Less: Variable costs (3.5M x 60%) 2,100,000
Contribution margin 1,400,000
Less: Fixed cost (1,800,000)
Operating income (400,000)

g. If the selling price per unit next year is reduced by 10% and an increase in variable
cost per unit by 5% due to the increase in the price of the supplier but this will result in
increase in quantity sold next year by 50%. What would be the result of the operation?
(use the contribution margin format)

Selling price next year reduced by 10% = 50 – 10% = 45

VC increase by 5% =30 + 5% = 31.50
Number of units increase by 50% = 120,000 x 50%= 60,000 + 120,000 = 180,000
 Number of units per unit Amount
Sales 180,000 45 8,100,000
Less: Variable cost 180,000 31.50 5,670,000
Contribution Margin 180,000 13.5 2,430,000
Less: Fixed Cost 1,800,000
Operating income 630,000

Sample problem: For the current period, BackMe Corp. 80,000 units of Backbacks were
sold. Selling price per unit is P20, variable cost per unit is P12 per unit and total fixed
cost amounted to P400,000

Requirement A. Prepare income statement using CM approach.

No. of units Per unit Amount %

Sales 80,000 20 1,600,000 100%
Less: Variable cost 80,000 12 960,000 60%
Contribution margin 80,000 8 640,000 40%
Less: Fixed costs 400,000
Operating income 240,000

Additional Assumptions: I. Fixed cost amounted to P 400,000 (if what is required is

number of units) II. Fixed cost amounted to P500,000 (if what is required is Peso sales)

Requirement b. B.1 - Break even point in units = Fixed cost/CM per unit

= 400,000/8

= 50,000 units

Proof:

Sales (50,000 x 20) 1,000,0000

Less: Variable costs (50,000 x 12) 600,000

Contribution margin (50,000 x 8) 400,000

Less: fixed cost 400,000

Operating income -
B.2 - Break even point in Peso sales = Fixed cost/CM ratio

= 400,000/40%

= 1,000,000

Proof:

Sales 1,000,0000

Less: Variable costs (1M x 60%) 600,000

Contribution margin (1M x 40%) 400,000

Less: fixed cost 400,000

Operating income -

Requirement C. C.1. If number of units sold next year exceeded the break-even point by
12,000 units, what is the profit or loss?

12,000 x 8 = 96,000

Proof:

12,000 + 50,000 =62,000 units

Sales

C.2. If the total sales next year is short by P150,000 to break-even, what is the profit or
loss?

Requirement D: Assuming the target (desired) profit next year is P300,000.

D.1 - How many units to sell in order to achieve the target profit?

= Fixed cost + desired profit/ CM per unit

D.2 - How much Peso sales to realized to achieve the target profit?

= Fixed cost + desired profit/Cm ratio

Requirement E. Assuming the desired profit is P300,000 after 25% tax

= Fixed costs + (desired profit/1-tax rate)/CM per unit

Fixed costs + (desired profit/1-tax rate)/CM ratio

E.1 - How many units to sell to earned the desired after tax profit?

E.2 - How much Peso sales to realized the desired after tax profit?

Requirement F - Desired profit is P3.00 per unit. How many number of units to be sold?

= fixed cost/CM per unit - desired per unit

Requirement G: How much sales to be generated to have profit of 15% of sales?

= fixed cost/CM ratio – desired %

Requirement H - Going back to Requirement A, assuming the same price per unit,
variable cost per unit and total fixed costs, however the total number of units projected
to sell next year is 95,000. Compute for the margin of safety in Peso sales, margin of
safety in units and margin of safety in percentage