Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 34

Sensitivity Analysis

Sanjana’s Sweet Shoppe operates on the boardwalk of a New England coastal town. The store only opens for the summer season and the business is heavily dependent on the weather and the economy in addition to new competition. Sanjana Sweet, the owner, prepares a budget each year after reading long-term weather forecasts and estimates of summer tourism. The budget is a first step in planning whether she will need any loans and whether she needs to consider adjustments to store staffing. Based on expertise and experience, she develops the following:

Scenario	Gross Margin  per Customer  (Price - Cost of Goods)	Number of Customers
Good	$5	30,000
Fair	4	20,000
Poor	2	15,000

Sanjana assumes, for simplicity, that the gross margin and the estimated number of customers are independent. Thus, she has nine possible scenarios. In addition to the cost of the products sold, Sanjana estimates staffing costs to be $25,000 plus $2 for every customer in excess of 20,000. The marketing and administrative costs are estimated to be $10,000 plus 3 percent of the gross margin.

Required

Use a spreadsheet to prepare an analysis of the possible operating income for Sanjana similar to that in Exhibit 13.15. What is the range of operating incomes?

Step 1 of 4

Budget

Budgets are the estimates the company makes regarding its financial performance. At beginning of the year company estimates the revenue, expenses and based on it estimates its operating and net income. Based on the income statement it also determines its financial position. Thus, budgets are management estimates for the coming year. Budgets are prepared in order to allocate funds and for the managers to achieve the targets for coming year. At end of the year when the actuals are prepared company compares its budget with the actuals so as to analyze its performance in relation to the budget.