MODULE 5

MASTER BUDGETTING

1. Master Budget

EXO Company is a manufacturer of computer products. One of these products is a video conferencing product. Maintaining this product is an important area of customer satisfaction. A recent downturn in the computer industry has caused the video conferencing product to suffer, leading to a decline in EXO Company's financial performance. The following income statement shows results for 2019.

Revenues

Equipment P8,000,000

Maintenance Contract 1,900,000

Total Revenues P9,900,000

Cost of goods sold 4,000,000

Gross Profit P5,900,000

Operating expenses:

Marketing P 630,000

Distribution 100,000

Customer maintenance 1,100,000

General administration 920,000

Total operating expenses 2,750,000

Operating income P3,150,000

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EXO Company is preparing its 2020 budget and is studying the following information:

1. Selling prices of equipment are expected to increase by 10% as the economic recovery begins. The price of each maintenance contract is expected to remain unchanged from 2019.
2. The equipment sales in units are expected to increase by 6%, with a corresponding 6% growth in units of maintenance contracts.
3. Cost of each unit sold is expected to increase by 5% to pay for the necessary technology and quality improvements.
4. Marketing costs are expected to increase by P290,000, but administrative costs are expected to remain at 2019 levels.
5. Distribution costs vary in proportion to the number of units of equipment sold.
6. Two maintenance technicians are to be hired at a total cost of P160,000; which covers wages and related travel costs. The objective is to improve customer service.
7. There is not beginning or ending inventory of equipment.

Required:

1. Prepare a budgeted income statement for the year ending December 31, 2020.
2. How well must the budget align with EXO's strategy?
3. How does preparing the budget help EXO management team better manage the company?