The explanation should emphasize the importance of considering both quantitative and qualitative factors in budgeting. Coyle Manufacturing needs to carefully analyze cost drivers, production changes, and market conditions to create a realistic budget that aligns with its strategic goals and economic environment. The cash basis of operations is also crucial in understanding the actual cash flows within the business.
To prepare a budgeted income statement for year 2 for Coyle Manufacturing, we need to take into account the expected changes in various components based on the provided information. Let's calculate each line item:
Sales Revenue:
- Expected unit volume increase by 5%, but prices are expected to fall by 10%. Therefore, the expected increase in sales revenue is calculated as (1 + 5%) * (1 - 10%) * Sales revenue year 1.
Manufacturing Costs:
- Materials costs per unit are expected to decrease by 8%.
- Unit variable cash manufacturing costs are expected to increase by 15%.
- Fixed cash manufacturing costs (depreciation) are expected to increase by 10%.
Marketing and Administrative Costs:
- Variable marketing costs will change with unit volume (5% increase in unit volume).
- Administrative cash costs are expected to decrease by 10%.
- Depreciation:
- Manufacturing depreciation is expected to increase by 10%.
- Marketing and administrative depreciation will remain the same.
Total Costs:
- Sum of the calculated manufacturing costs, marketing costs, and administrative costs.
Operating Profits (Losses):
Sales Revenue - Total Costs.