American Construction prepared a budget for the budget period ending 3/31/2009.
ID: 2731751 • Letter: A
Question
American Construction prepared a budget for the budget period ending 3/31/2009. The earnings required ($8,517,328) exceeded the bonding capacity ($8,000, 000). The summary of the initial budget is listed in the second and third columns of the following table, while the attainable budget is listed in fourth and fifth columns. If the company decreases price by 5%, what earnings are required to yield the Net Profit (before tax) of $256,667? (To answer this problem, please refer to the example under Decreasing Price on Page 6-5. and create a table similar to Table 6.2). If the company increases price by 5%, what earnings are required to yield the Net Profit (before tax) of $256,667? (To answer this problem, please refer to the example under Increasing Price on Page 6-7. and create a table similar to Table 6.3). If the company decrease the variable cost to earnings ratio by 1%, what earnings are required to yield the Net Profit (before tax) of $256,667? (To answer this problem, please refer to the example under Decreasing Project Costs on Page 6-10, and create a table similar to Table 6.6).Explanation / Answer
Attainable
5% Price Decrease
Earnings
$8,000,000
Earnings
$8,091,462
Variable Cost
$7,253,600
0.9067
Variable Cost
$7,296,795
0.9018
Fixed Cost
$538,000
Fixed Cost
$538,000
Net Profit
$208,400
Net Profit
$256,667
Marginal Ratio
0.0933
Marginal Ratio
0.0982
Earnings = Initial Earnings x (1-0.05) = $8,517,328 x 0.95 = $8,091,462
Variable Cost = New Earnings – Fixed Cost – Net income (before tax)
=> $8,091,462 - $538,000 - $256,667 = $7,296,795
Variable cost to earnings ratio = $7,296,795 / $8,091,462 = 0.9018
Marginal Ratio = 1 – Variable cost to earnings ratio => 1 – 0.9018 = 0.0982
Note: Please provide image of examples from your book to solve other 2 questions
Attainable
5% Price Decrease
Earnings
$8,000,000
Earnings
$8,091,462
Variable Cost
$7,253,600
0.9067
Variable Cost
$7,296,795
0.9018
Fixed Cost
$538,000
Fixed Cost
$538,000
Net Profit
$208,400
Net Profit
$256,667
Marginal Ratio
0.0933
Marginal Ratio
0.0982
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