Budgeted Income Statement And Penlights Analysis

Budgeted Income Statement for Aussie Medical Company

Question:

Discuss about the Pricing of Information Products.

Budgeted Income Statement for Aussie Medical Company using both the alternatives are shown below –

Aussie Medical Company
Budgeted Income Statement Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper
Particulars	Casual Agents	Full time Salesperson
Sales	30,000,000	30,000,000
Cost of Goods sold
Variable	17,400,000	17,400,000
Fixed Cost	2,800,000	2,800,000
Gross Profit	9,800,000	9,800,000
Selling and Administrative Expenses
Commissions @20%	6,000,000	–
Commissions @10%	–	3,000,000
Salary to Salesperson	–	700,000
Sales Manager & others Salary	–	200,000
Travel Expenses	–	400,000
Fixed Advertising Expense	800,000	1,300,000
Fixed Administrative Expense	3,200,000	3,200,000
Operating Income	(200,000)	1,000,000

As per the question, if revenue remains same, the company should opt for Option of hiring full time sales person, as it can be clearly seen in the budgeted income statement that in this option, company would be having operating income of $1,000,000 whereas in case the company decides to have casual agents and pay 20% commission on sales then there would be a loss of $200,000.

Particulars	BM110	BM210
Selling Price per unit	160	195
Variable Cost per unit	25	30
Contribution per unit	135	165
Development cost per unit	70	100
Marketing and Administrative cost per unit	35	40
Total cost per unit	130	170
Operating Income per unit	30	25

As per the concept of costing, any cost that has already been incurred should not be relevant for decision making purpose. Such costs are called sunk costs. In the said question, 150 units of BM110 has already been made i.e. no more cost is going to be incurred on the same. Even the variable cost has been incurred, so the income from sale of 150 BM110 units = 150* selling price of 160 = 24,000.

Whereas if we sell, BM210, the contribution per unit would be its selling price i.e. 195 – the variable cost the company is incurring i.e. 30, so contribution per unit would be 195-30 = 165. The total contribution would be 150*165 = 24,750. In case of BM210, we will not consider the fixed cost like development cost and marketing cost as that will be incurred no matter these extra 150 units are sold or not. So in conclusion, BM210 should be introduced in the market immediately, as there is incremental revenue of 750.

The company should also consider into factors like what are the benefits it is giving to the doctors and patients in bringing the latest technology, how are they impacting the industry, what kind of market is getting shaped. They should also consider how mature is the market to accept the product, whether proper distribution network is set-up to meet the demand of the new blood pressure machine.

Penlights Particulars	Amount $
Selling Price	6.00
Manufacturing Cost
Direct Material	1.00
Direct labour	1.20
Variable Overhead	0.80
Fixed Overhead	0.50
Cost of Goods Sold	3.50
Gross Margin	2.50
Selling Cost
Fixed Cost	0.90
Variable Cost	1.50
Net Profit per unit	0.10

If the company sells 5000 penlights to the government hospital, it won’t be able to sell the same to its customers, as they are running at maximum capacity.

Profit from selling 5000 units to customers = 5000*0.10 = $ 500

Profit from selling 5000 units to government = $ 1500 – Fixed cost of Marketing, as that will be charged to the units (Variable cost will be avoided)

= $ 1500 – 5000*0.90

= 1500 – 4500

= (3000)

 Since company would be incurring loss in government order, it is recommended not to supply to them in this situation.

Particulars	Unit	Price	Total
Total Sales	20000	6	120000
Total Cost
Fixed Overhead	20000	0.25	5000
Fixed Marketing Cost	20000	0.9	18000
Variable Marketing Cost	20000	1.2	24000
Existing Profit	20000	0.1	2000
Maximum Chargeable	20000	3.55	71000

Assumption: Outsourcing of Full capacity – 20,000 units

If the company decides to outsource its manufacturing of penlights, company won’t be incurring costs like material cost or labour cost, but will still incur certain other expenses as shown above i.e. fixed overhead and fixed marketing cost and 80% of existing variable marketing cost. The selling price in the market will still be the same, no matter who produces it. The company would also like to maintain its existing margin of $ 2000 on total capacity and hence, the maximum the company can pay would be $ 71,000 for 20,000 units bringing it to $ 3.55 per unit. Any cost paid more than this would mean, company is not able to meet its current margin.

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