Flexible budget

Question 1 (12 Marks)

A trader at the Stables Market sells various antique items. On average, each customer
spends R95 and a gross margin of 40% is achieved.
On top of purchase costs, variable costs are staffing which averages to 12% of sales;
packaging materials including polystyrene and bubble wrap which is approximately 3%
of sales and holding costs which are estimated to be R8 per unit.

In addition, the trader incurs a number of fixed costs which are independent of the sales
level. These include rent of R50 000 per annum and depreciation of R12 000 per
annum. The trader has received a notice that there will be a 10% increase in rental.

For the year 2012, sales are expected to be linked to the overall state of the economy. If
there are boom conditions, it is estimated that there will be 20 000 customers, but if
there is a recession, only 10 000 such customers can be expected.

At the end of 2012, the actual results for the year were as follows:

An inexorable rise of basics, food, fuel and power and increases in interest rates by the
Reserve Bank slowed down the economy and resulted in a recession and job losses.
With the result sales volume of only 10 000 was achieved.
The value of each average sale was slightly lower than expected at R90.

Unexpectedly competition moved into the main market of the trader. A mini price war
resulted and on average a gross margin of only 30% was achieved. However, because
of the increased efficiency, staffing costs came to 9% of sales and packaging costs to
1% of sales. Rent was unexpectedly increased by a further R5 000, whereas the
depreciation charge remained unchanged.

Required:
1) Draw up a performance income statement for the trader for the year 2012
providing flexed budget and actual results for the recession state of the economy.

Solution

Flexed Actual: Variance

Budget: Recession
Recession
10 000 units 10 000 units -✓
Sales R950 0001✓ R900 0001✓ 50 000u1✓
Cost of 570 000 630 000 60 000u
Sales (60%)
Gross Profit 380 0001✓ 270 0001✓ 110 000u1✓
(40%)

Less: 289 500 242 000 47 500f

Expenses
Staffing 114 0001✓ 81 0001✓ 33 000f1✓
Packaging 28 5001✓ 9 0001✓ 19 500f1✓
Holding 80 0001✓ 80 0001✓ -1✓
(R8 / unit)
Rent 55 0001✓ 60 0001✓ 5 000u1✓
Depreciation 12 0001✓ 12 0001✓ -1✓

Net Profit 90 500 28 000 62

500u1✓1✓m