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CVP Analysis


Exercise 1: Budgeting Chair & Chair Limited manufactures antique-looking, oak rocking chairs. Budgeted sales for the first five months of the year are as follows: Budgeted sales (units) January 200 February 240 March 180 April 160 May 240 Each rocking chair requires 10 square metres of oak, at a cost of $20 per square metre. The company wants to maintain an inventory of chairs equal to 25% of the following month’s sales. At the beginning of the year, 40 chairs are on hand. Assume the company maintains an inventory of oak equal to 10% of the next month’s needs. At the beginning of the year, 240 square metres of oak are on hand. Inventory of oak at 31 March is estimated to be 180 square metres. Required: a.        Prepare a production budget, in units, for each of the first four months of the year. b.        Prepare a purchases budget, in dollars, for each of the first three months of the year. c.         Briefly discuss the role of budgeting in planning, control and decision making. d.        Discuss some of the drawbacks of traditional budgeting and some of the alternatives of it