MA49 Problem: Budgeting - Martin Company

MA49 Problem: Budgeting - Martin Company

 The following forecasted variable costing income statement was prepared for Martin Company.Sales $100,000Variable costs 45,000Contribution margin $55,000Fixed costs 25,000 Net income $30,000The President of Martin knows that there is uncertainty associated with all of these estimates. Currently,the pro forma statement represents the most likely outcome. The President, however, wants to conduct asensitivity analysis to examine the worst case and best cases scenarios as well. After consultation with hismanagers, the following additional information was determined:

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The worst case and best case scenarios for sales represent a +/- change of 25% of the most likelylevels.

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The worst case and best case scenarios for fixed costs represent a +/- change of 20% of the mostlikely levels.

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Variable costs are always proportional to sales. The worst case for the behaviour of variable costsis that they climb to 60% of sales. The best case scenario for variable costs is that they fall to 40%of sales.

 Required:

Calculate the net income for Martin Company using all variables at their worst case levels. Repeat this process and calculate the net income with all variables assuming their best case levels. How likely do youthink these ends points are