Budget sensitivity analysis, strategic and operating plans, business risks Jeffe

Question

Budget sensitivity analysis, strategic and operating plans, business risks Jeffery, the owner of Unique Sinks, realizes that if he withdraws the full amount of dividend, and if the slump in housing starts continues into the next year, he may need to borrow more money than he can easily repay. He would like to alter strategies or operating plans during the fourth quarter so that he could pay at least a $50,000 dividend and end the year with $300,000 in cash to cover potential shortfalls in the next year, have 0 balance on the line of credit borrowing and eliminate the loss from 4th quarter. A. Cost side subgroup: Modify the assumptions and perform sensitivity analyses to identify a set of cost reductions and/or payment deferrals that would allow Jeffery to meet his goals. Leave all other assumptions unchanged. 1. List the changes in your final sensitivity analysis, and explain why you chose this set of changes. 2. Briefly explain what Jeffery would need to do to implement each of these changes. 3. List several business risks or other factors that could influence whether the company would be able to achieve the desired results. Be sure to check your projected results against all 4 goals. B. Revenue side subgroup: Return to the original assumptions. Now modify the assumptions and perform sensitivity analyses to determine what changes to volumes, prices, and/or customer collection patterns would provide the desired dividend. Leave all other assumptions unchanged. 1. List the changes in your final sensitivity analysis, and explain why you chose this set of changes. 2. Briefly explain what Jeffery would need to do to implement each of these changes. 3. List several factors that could influence whether the company would be able to achieve the desired results. Be sure to check your projected results against all 4 goals. Budget sensitivity analysis, strategic and operating plans, business risks Jeffery, the owner of Unique Sinks, realizes that if he withdraws the full amount of dividend, and if the slump in housing starts continues into the next year, he may need to borrow more money than he can easily repay. He would like to alter strategies or operating plans during the fourth quarter so that he could pay at least a $50,000 dividend and end the year with $300,000 in cash to cover potential shortfalls in the next year, have 0 balance on the line of credit borrowing and eliminate the loss from 4th quarter. A. Cost side subgroup: Modify the assumptions and perform sensitivity analyses to identify a set of cost reductions and/or payment deferrals that would allow Jeffery to meet his goals. Leave all other assumptions unchanged. 1. List the changes in your final sensitivity analysis, and explain why you chose this set of changes. 2. Briefly explain what Jeffery would need to do to implement each of these changes. 3. List several business risks or other factors that could influence whether the company would be able to achieve the desired results. Be sure to check your projected results against all 4 goals. B. Revenue side subgroup: Return to the original assumptions. Now modify the assumptions and perform sensitivity analyses to determine what changes to volumes, prices, and/or customer collection patterns would provide the desired dividend. Leave all other assumptions unchanged. 1. List the changes in your final sensitivity analysis, and explain why you chose this set of changes. 2. Briefly explain what Jeffery would need to do to implement each of these changes. 3. List several factors that could influence whether the company would be able to achieve the desired results. Be sure to check your projected results against all 4 goals.

Explanation / Answer

Answer :-

Goal for Senitivity Analysis

1) To achieve the target of distributing dividend of $ 50000.

2) To Achieve at least 300000 $ cash profits at the end of year.

For achieving the desised goal, each component of expense side as well as the revenue side must be evaluated and necessary decisions to be taken.

Cost Side Sensitivity Analysis

On the expenses side, the sensitivity analysis of the estimates provides for the following assumptions about changes to four broad groups of parameters. An increase in any of the parameters considered will lead to an increase in expenses and a decrease in any of the parameters will lead to a reduction in expenses:-

1) Prices :-

All price growth rates are assumed to change by one percentage point in the September quarter and to remain unchanged subsequently, with wage and salary growth rates left unchanged through the Budget and forward years.

2) Direct Labour :- The effect of a change in wage and salary growth rates is largely due to the Government’s commitment to maintain selected pensions.Component of D. Labour changes due to change in law related to Minimum Wages Act, Industrial Act or any Act relating to labour. In order to achieve the desired Goal, this component is analysed in the light of production.

labour productivity analysis to be done for better results and achieve desired results.

3) Factory/manufacturing Overheads :- Any change in factory overheads bring COGS to a new level. In order to achieve desired Goal, Factory expense like Power, Fuel, machining cost etc. to be analysed seperately and value engineered for minimising such Costs.

4) General operating expenses :- All the general expenses like Salaries, rent, Insurance and other general charges are to be analysed with regard to their effect on sales and sensitivity analysis is performed to meet the desired goal.

Revenue Side Sensitivity Analysis

On the revenue side, the sensitivity analysis of the estimates provides for the following assumptions about changes to five broad groups of parameters. An increase in any of the parameters considered will lead to an increase in revenue and a decrease in any of the parameters will lead to a reduction in revenue :-

1) Final demand of product :- Sensitivity analysis is performed and link is established for marketing expense and demand of the product. Cost revenue analysis can be done for such parameter. Any increase on cost side should have inverse impact on the sales demand of product. Sales for the product depends on the demand of product.

2) Prices : - As demand of product rises, supply of Inventory will be allocated at desired Prices. If Price could be changes by some percentage, this will highens the net profit thus achieving the goal of distributing dividend of $ 50000 can be achieved.

3) Collection crieteria :- Credit period defined for effecting sales should be carefully analysed, so that cash surplus of the company get empowered. if sales done are collectible well in time, company would have in hand cash resources and there is no need for further loans and in return co. could writte off old loans .

In this case, all the goals of sensitivity analysis can be met.

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