Refer to the information from Problem 10.49, Parts 1, 2,

Refer to the information from Problem 10.49, Parts 1, 2, and 3. The budget indicates that the company is likely to incur a loss during the next period. The accountant asks you to assist him in developing sensitivity analyses that will help the manager identify possible ways to avoid a loss. To perform sensitivity analysis, you will alter volume of production, volume of sales, selling prices, direct material prices, wage rates, and overhead and support department costs.
Information from Problem 10.49, Parts 1, 2, and 3
Part1.
Following are the assumptions regarding revenues, direct materials and labour costs, and inventory levels:

Part2

Refer to the information for Part 1. Following are estimated manufacturing overhead costs. Both fixed and variable overhead will be allocated based on the number of kites produced:

Estimated variable manufacturing overhead costs:

Supplies ……………………………………………..$160,250

Indirect labour ……………………………………….200,650

Maintenance …………………………………………..80,200

Miscellaneous …………………………………………40,100

Total variable overhead costs …………………….$481,200

Estimated fixed manufacturing overhead costs:

Amortization ……………………………………….$211,728

Property taxes …………………………………………28,872

Insurance ……………………………………………..67,368

Plant management …………………………………..240,600

Fringe benefits ………………………………………336,840

Miscellaneous ………………………………………..76,992

Total fixed overhead costs ………………………$962,400

Part3

Refer to the information for Parts 1 and 2. Following is the information that the accountant collected about support department costs:

Support department:……………………….. Fixed Costs

Administration……………………………… $1,034,580

Marketing ……………………………………….620,748

Distribution ……………………………………..310,374

Customer service ……………………………….103,458

Total support department costs ………………$2,069,160

REQUIRED

A. Identify the assumptions that are relevant for sensitivity analysis. Relevant assumptions are assumptions that the manager could potentially influence by changing the company’s operating plans.

B. Identify possible changes in budget assumptions that might eliminate the forecasted loss (i.e., that would lead to a breakeven).

C. Perform sensitivity analysis, using the input section of your spreadsheet to determine a set of assumption changes that would cause budgeted income to break even. Explain your choices.

D. Describe uncertainties and their effects on the assumptions you made in Part A.

 

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