Question

ABC Company is in the process of preparing a budget for the upcoming year. The marketing department has just increased the number of units in the sales budget by a significant 50% as compared to the last sales budget that was prepared for the year. Explain the impact this change will have on the Contribution Margin Income Statement.

Be specific about…

how the components of the Income Statement will be affected.

what company managers must do differently to implement the revised budget.

Answer 1

Contribution Margin has been defined as the difference between the Sale price and Variable expenses .When the marketing manager has increased the number of units in the sales budget by 50% the contribution Margin will also increase by 50% but the contribution margin ratio will remain same .This can be explained with the help of an example.

Suppose initially there were 20000 units and sale price per unit is $10 and Variable expenses were $5 per unit .When the marketing department has increased the number of units in the sales budget by 50% then the number of units become (20000 *50%) = 10000 +20000 =30000 .As the marketing department has just increased the number of units but sales price per unit and variable expense per unit has remained the same. This can be explained below

	Before increasing	After increasing 50%
Number of Units (A )	20000	30000
Sales (A *10)	200000	300000
Less Variable expenses (A*5)	(100000)	(150000)
Contribution Margin	100000	150000
Less Fixed expenses	(50000)	(50000)
Net Income	50000	100000
Contribution Margin Ratio	100000 / 200000    = 50%	150000 /300000 =50%

This indicates that if the number of units has been increased or decreased but the selling price per unit and variable expenses per unit will remain same then the contribution margin will also increase in same proportion.

If the managers want to make changes in sales budget by increasing the number of units by 50% then he has to either change the selling price per unit or Variable expenses per unit or both