Question

Joe’s Airport Cafe sells sandwiches for $5. The variable cost per sandwich is $3. The company incurs $50,000 of fixed costs per year. The company expects to sell 40,000 sandwiches in the coming year.

a. Based on these data, prepare a static budget for the coming year.

b. Holding all other factors constant, how would net income differ from the static budget if fixed costs were 10 percent higher than expected?
c. Holding all other factors constant, how would net income differ from the static budget if fixed costs were 10 percent lower than expected?
d. Holding all other factors constant, how would net income differ from the static budget if variable costs were 10 percent higher than expected?
e. Holding all other factors constant, how would net income differ from the static budget if variable costs were 10 percent lower than expected

Answer 1

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Joe’s Airport Cafe
Workings for Static Budget	Amount $	Note
Number of sandwich	40,000.00	A
Sell price	5.00	B
Revised sales value	200,000.00	C=A*B
Variable cost per sandwich	3.00	D
Total Variable cost	120,000.00	F=A*D
Answer a- Static Budget
Sales	200,000.00	See A
Less: Variable costs	120,000.00	See D
Contribution margin	80,000.00
Less: Fixed costs	50,000.00	E
Net Income	30,000.00	F
Workings for Answer b	Amount $
Fixed costs	50,000.00	See E
Increase by 10%	5,000.00	G=E*10%
Revised Fixed costs	55,000.00	H=E+G
Answer b
Sales	200,000.00	See A
Less: Variable costs	120,000.00	See D
Contribution margin	80,000.00
Less: Fixed costs	55,000.00	See H
Net Income	25,000.00	I
Decrease by	5,000.00	J=F-I
Workings for Answer c	Amount $
Fixed costs	50,000.00	See E
Decrease by 10%	5,000.00	G=E*10%
Revised Fixed costs	45,000.00	K=E-G
Answer c
Sales	200,000.00	See A
Less: Variable costs	120,000.00	See D
Contribution margin	80,000.00
Less: Fixed costs	45,000.00	See K
Net Income	35,000.00	L
Increase by	5,000.00	M=L-F
Workings for Answer d	Amount $
Variable cost per sandwich	3.00	See D
Increase by 10%	0.30	N=D*10%
Revised Variable cost per sandwich	3.30	O=D+N
Total Variable cost per sandwich	132,000.00	P=O*A
Answer d
Sales	200,000.00	See A
Less: Variable costs	132,000.00	See P
Contribution margin	68,000.00
Less: Fixed costs	50,000.00	See E
Net Income	18,000.00	Q
Decrease by	12,000.00	R=F-Q
Workings for Answer e	Amount $
Variable cost per sandwich	3.00	See D
Decrease by 10%	0.30	N=D*10%
Revised Variable cost per sandwich	2.70	S=D-N
Total Variable cost per sandwich	108,000.00	T=S*A
Answer e
Sales	200,000.00	See A
Less: Variable costs	108,000.00	See T
Contribution margin	92,000.00
Less: Fixed costs	50,000.00	See E
Net Income	42,000.00	U
Increase by	12,000.00	V=U-F