Importance of Accurate Ending Inventory in Budgeting and CVP Analysis for Mortonson Sales Projection

QUESTION 4

At Lakeside Manufacturing, budgets are the responsibility of everyone. Each department collaborates in determining its expected needs, and sales personnel determine the likely sales volume. Al Talbott, one of the production managers, believes in building plenty of slack into everything, including his estimates of ending inventory of work in process.

Required

You are the accounting manager. Write a memo to Mr. Talbott. Explain why the ending inventory figure should be extremely accurate, with as little slack as possible.      

QUESTION 5

Budgeting can be an important management tool if implemented properly. Identify several positive results when budgets are used properly. Since budgets affect people, identify several negative aspects if budgets are not implemented properly.                             

QUESTION 6

Mortonsen has collected the following information after its first year of sales. Net sales were RM2,000,000 on 100,000 units; selling expenses RM400,000 (30% variable and 70% fixed); direct materials RM600,000; direct labor RM340,000; administrative expenses RM500,000

(30% variable and 70% fixed); manufacturing overhead RM480,000 (20% variable and 80% fixed).

Top management has asked you to do a CVP analysis so that it can make plans for the coming year. It has projected that unit sales will increase by 20% next year. 

Required

Compute

(1) The contribution margin for the current year and the projected year.                 

(2) The fixed costs for the current year. (Assume that fixed costs will remain the same in the projected year.)                                                                                             

      (3) Compute the break-even point in units and sales dollars.                      

(4) The company has a target net income of RM374,000. What is the required sales in dollars for the company to meet its target?                                              

      (5) If the company meets its target net income number, by what percentage could its sales fall before it is operating at a loss? That is, what is its margin of safety ratio?