Julie Welk, Head of Finance Calls you into her office and says:

The Directors have been looking at the draft budget for the new PEXECO production facility for the 4^th month period September to December selling prices were reduced by 10%, sales volumes would increase by 30%.

Mia Schmied, Managing Director, is far less confident that sales would increase as much as Ben believes. She has requested that we perform sensitivity analysis and also consider expected values. I prefer What If to sensitivity analysis and have produced profit estimates based on Bens assumptions. I think that there is likely to be an increase in fixed costs when volumes increase by more than 20% so my profit estimates also include the effect of this. I have also estimated probabilies so that I could calculate expected values.

There has also been some discussion amongst the directors about the fixed production overheads included in the budget for the new production facility. Whilst some overhead expenditures, such as depreciation, have been easy to predict, other overheads, such as machinery maintenance are more dificult. Within the new facility it is planned that each piece of machinery will have a routine service 3 times a year to ensure that it is in optimal condition. In addition, maintenance employees will be required to make repairs as and when the arises.

Diane Rechnung, Finance Director, has suggested the use of activity-based budgeting as a different approach for establishing some of the overhead expenditure budgets. She has asked for me to look into this.

I have included the What-If analysis and the expected value tables in a schedule I will give to you shortly. I would like you to prepares a briefing paper for the senior management team which explains:

• How the budget for the maintenance employee cost in the new production facility could be established using an activity-based budgeting approach. (32%)

'WHAT-IF'ANALYSIS ON THE PEXECO BUDGET FOR THE FOUR MONTHS SEPTEMBER TO DECEMBER 2020 Table 1: Revenue Variable costs Contribution Fixed costs Profit Original budget G$000 4,860 (1.347) 3,513 (1.120) 2,393 Assumption Assumption Assumption Assumption A A B B Revised % change Revised % change budget budget GS000 GS000 5,310 + 9% 5.686 +17% (1.550) + 15% (1.751) +30% 3,760 +7% 3,935 +12% (1.120) 0% (1.176) 5% 2,640 +10% 2,759 +15% Notes: Assumption A is that a 5% reduction in average selling price will lead to a 15% increase in volumes sold. Assumption B is that a 10% reduction in average selling price will lead to a 30% increase in volumes sold and a 5% increase in fixed costs. The % change under each assumption is from the original budget. . IMPACT OF CHANGING SELLING PRICES USING EXPECTED VALUES Table 2: If decrease average selling prices by 5%: Change in sales volume No change +7.5% +15% Probability 0.2 0.5 0.3 Budgeted profit G$000 2,150 2.395 2,640 Expected value G$000 430 1.198 792 2,420 Table 3: If decrease average selling prices by 10%: Change in sales Budgeted profit volume Probability G$000 No change 0.1 1.907 +15% 0.8 2.361 +30% 0.1 2,759 Expected value G$000 191 1.889 276 2.356 'WHAT-IF'ANALYSIS ON THE PEXECO BUDGET FOR THE FOUR MONTHS SEPTEMBER TO DECEMBER 2020 Table 1: Revenue Variable costs Contribution Fixed costs Profit Original budget G$000 4,860 (1.347) 3,513 (1.120) 2,393 Assumption Assumption Assumption Assumption A A B B Revised % change Revised % change budget budget GS000 GS000 5,310 + 9% 5.686 +17% (1.550) + 15% (1.751) +30% 3,760 +7% 3,935 +12% (1.120) 0% (1.176) 5% 2,640 +10% 2,759 +15% Notes: Assumption A is that a 5% reduction in average selling price will lead to a 15% increase in volumes sold. Assumption B is that a 10% reduction in average selling price will lead to a 30% increase in volumes sold and a 5% increase in fixed costs. The % change under each assumption is from the original budget. . IMPACT OF CHANGING SELLING PRICES USING EXPECTED VALUES Table 2: If decrease average selling prices by 5%: Change in sales volume No change +7.5% +15% Probability 0.2 0.5 0.3 Budgeted profit G$000 2,150 2.395 2,640 Expected value G$000 430 1.198 792 2,420 Table 3: If decrease average selling prices by 10%: Change in sales Budgeted profit volume Probability G$000 No change 0.1 1.907 +15% 0.8 2.361 +30% 0.1 2,759 Expected value G$000 191 1.889 276 2.356