Question

Cycle Fit Company is a manufacturer of commercial grade exercise bikes that are sold to hotels and health clubs. Maintaining the bikes is an important area of customer satisfaction. Because of increase industry​ competition, Cycle Fit​'s financial performance has suffered.​ However, the introduction of a new model and a predicted upturn in the economy are leading Cycle Fit​'s managers to predict improved performance in 2021. The following income statement shows results for 2020.

Cycle Fit Company Income Statement for the Year Ended December​ 31, 2020 ​(in thousands)

Revenues:
Equipment	$8,500
Maintenance contracts	1,400
Total revenues		$9,900
Cost of goods sold		4,200
Gross margin		5,700
Operating costs
Marketing	630
Distribution	180
Customer maintenance	1,900
Administration	990
Total operating costs		3,700
Operating income		$2,000

Cycle Fit​'s management team is preparing the 2021 budget and is studying the following​ information:

1.	Selling prices of bikes are expected to increase by 15​% due to the introduction of the new model. The selling price of each maintenance contract is expected to remain unchanged from 2020.
2.	Bike sales in units are expected to increase by 8​%, with a corresponding 8​% 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 for the new model.
4.	Marketing costs are expected to increase by $230​,000.
5.	Distribution costs vary in proportion to the number of bikes sold.
6.	One additional maintenance technician is to be hired at a total cost of $190​,000, which covers wages and related travel costs. The objective is to improve customer service and shorten response time.
7.	There are no anticipated changes to adminstration costs.
8.	There is no beginning or ending inventory of equipment.

1.	Prepare a budgeted income statement for the year ending December​ 31, 2021.
2.	How well does the budget align with Cycle Fit​'s ​strategy?
3.	How does preparing the budget help Cycle Fit​'s management team better manage the​ company?

Answer 1

1) Budgeted Income Statement for the year ended 31st December 2021
Particulars				$ ( in thousands)
Revenue:
Equipment		(8500x1.15x1.08)	10557
Maintenance Contracts	(1400x1.08)	1512
Total Budgeted Revenue			12069
Cost of goods sold		(4200x1.08x1.05)	4762.8
Gross Margin				7306.2
Operating costs
Marketing		(630+230)	860
Distribution		(180x1.08)	194.4
Customer Maintenance	(1900+190)	2090
Adminstration				990
Total Budgeted Operating Costs		4134.4
Budgeted Operating Income		3171.8

2) The budget prepared above shows an increase in the operating income of the company. Cycle Fit's strategy is to introduce a new model and take advantage of the predicted upturn in the economy to improve its performance. Here the budget shows an increase in the revenue due to equipment which confirms new models positive impact on the income of the company.

3) Preparing the budget helps the Cycle Fits management team better mange the company by giving a better idea of what is acheivable and what is likely to happen in  forthcoming period. Also helps in planning to control the costs which are avoidable or which can be reduced. Budget also provides motivation by anticipating the achievable income.