Question

Why are budgets necessary? Do you suppose budgets are still necessary if a business is profitable

Why does human behavior need to be considered when establishing budgets?

key terms

1. Capital budgeting
2. Operations budgeting
3. Master budget
4. Pro forma financial statements

As you know from your pre-class work, W.T. needs to determine how much he’ll charge the customers of My Assistant. Keep in mind that he’ll need to (1) cover costs and (2) earn a profit so he can be paid.

Part 1

We’ve already done quite a bit of work on projected costs for My Assistant, so pull out your notes from Packet #2. To recap, W.T.’s planning on the following:

Newspaper ad	$120 per month
Social media manager	$100 per month; $1 per job scheduled
Payment collection	$0.75 per job
Gas	$4.00 per job

Considering his analysis of similar services and to keep things simple, W.T. plans to price all jobs the same and charge $15 per job. Because of this flat rate, he anticipates he’ll likely need to create different types of “jobs”. For example, purchasing a list of items at the grocery store would be one job, while a bundle of 2-3 small errands such as picking up dry cleaning and prescriptions, might be considered one job. We’ll deal with those details later. For now, assume that all jobs are priced at $15 each and all have the associated variable expenses listed above.

Because this will be a new business, W.T. knows business will likely be slow at the beginning. Complete the following table assuming W.T. completes 10 jobs in a single month.

Item	Per Job	Total (10 jobs)	Computations
Sales	$	$
Less: Variable Cost	$	$
Contribution Margin	$	$
Less: Fixed Cost	$	$
Gross Margin	$	$

Part 2

Yikes! He’ll clearly have to complete more than 10 jobs. W.T. needs to be able to at least cover his costs. Still using the preliminary estimates provided, how many jobs would W.T. have to complete to break even? What would that be in dollars?

(1) Contribution margin:

Sales price per job	$
Less: Variable costs per job	$
=Contribution margin per job	$

(2) Break-even point in units:

Fixed costs	=	$	=	jobs
Contribution margin per job		$

Note: W.T. won’t be paid if he only completes part of a job.

(3) Break-even point in sales:

Break-even point in jobs	x	Sales price per job	=	Break-even point in dollars
	x	$	=	$

Check your work:

Total sales	$
Less: Total variable costs	$
= Total contribution margin	$
Less: Total fixed costs	$
= Total profit	$

Question: Why is breakeven profit not exactly $0?

Answer 1