A memo is a form of communication used in an institution to pass information to the intended recipients regarding a certain subject. The purpose of the current paper is to compute the net income using the actual prices and volumes and compare it with the net income if option 2 was chosen, and write a memo explaining to the company owners why the net income in the revised budget is different from the one in the flexible budget.
Flexible Budget Using the Actual Prices and Volumes with the Standard Production Costs
|Less: Cost of products sold||27,150,000|
|Less interest expense||420,000|
|Plus interest income||150,000|
|Income before tax||7,355,000|
|Less income tax||2,338,000|
The net income in the above-prepared budget was more than the net income in the revised budget prepared in question 2. This was caused by the difference in the prices and the volumes of the grills sold in the two scenarios that influenced the production costs and the revenues.
The 2009 profit was the result of the decreased price of Grill C. The lower the price is the higher the demand is; the grill was highly demanded that led to huge sales, hence more profits. The conducted advertising campaigns also led to more sales, as many people got know about the products.
While there was an improvement in 2009, it was not as great as it was expected due to the increase in some of the prices of the grills that might have led to a decreased demand as customers looked for cheaper substitutes. Therefore, the law of demand is applied that states that; “the higher the price the lower the level of demand and vice versa”. There was also stiff competition from the other companies, such as Weber, Ducane, Coleman, Sunbeam, and Holland that were the market leaders. Such immense competition may have led to a decreased demand of the grills as the other companies dominated the market.
SUBJECT: Why The Net Income Figures Were Unequal In The Two Budgets
Net income is always affected by the costs of production incurred depending on the volume of goods produced. Following the preparation of the revised budget, having taken into consideration that the second option of lowering the selling price of Grill C that would prompt to an increase in the units sold by 20,000 units was taken, and the flexible budget, there was a discrepancy in the two net incomes calculated. The net income in the revised budget was $4,242,000, while in the flexible budget it was $ 5,017,000. This happened due to the variance in the prices and the volumes of these products between the two scenarios. The actual price and volume of Grill A were $150 and 115,000 units respectively. At the same time, in the revised budged, price and volume of Grill were $150 and 80,000 units respectively. Grill B’s actual price and volume were $110 and 110,000 units respectively, while in the revised budget, price and volume were $110 and 120,000 units respectively. Grill C’s actual price and volume of Grill C were $75 and 225,000 units respectively, while in the revised budged price and volume were $ 75 and 220,000 units respectively. These variances further influenced the variable costs of producing the products that in turn affected the revenues raised. After the deductions of expenses (both variable and fixed) in the both cases, the net incomes were different.