Chapter 6 Solutions To Assigned Exercises

CHAPTER 6
MASTER BUDGET AND RESPONSIBILITY ACCOUNTING
6-16

(15 min.) Sales budget, service setting.

In 2014, Rouse & Sons, a small environmental-testing firm, performed 12,200 radon tests for
$290 each and 16,400 lead tests for $240 each. Because newer homes are being built with leadfree pipes, lead-testing volume is expected to decrease by 10% next year. However, awareness of radon-related health hazards is expected to result in a 6% increase in radon-test volume each year in the near future. Jim Rouse feels that if he lowers his price for lead testing to $230 per test, he will have to face only a 7% decline in lead-test sales in 2015.
Required:
1. Prepare a 2015 sales budget for Rouse & Sons assuming that Rouse holds prices at 2014 levels. 2. Prepare a 2015 sales budget for Rouse & Sons assuming that Rouse lowers the price of a lead test to $230. Should Rouse lower the price of a lead test in 2015 if the company’s goal is to maximize sales revenue?
SOLUTION
1.
Rouse & Sons
Radon Tests
Lead Tests

2014
Volume
12,200
16,400

At 2014
Selling Prices
$290
$240

Expected 2015
Change in Volume
+ 6%
–10%

Rouse & Sons Sales Budget
For the Year Ended December 31, 2015

Radon Tests
Lead Tests

Selling
Price
$290
$240

Units
Sold
12,932
14,760

Total
Revenues
$3,750,280
3,542,400
$7,292,680

Expected 2015
Volume
12,932
14,760

2.
Rouse & Sons
Radon Tests
Lead Tests

2014
Volume
12,200
16,400

Planned 2015
Selling Prices
$290
$230

Expected 2015
Change in Volume
+6%
–7%

Expected
2015 Volume
12,932
15,252

Rouse & Sons Sales Budget
For the Year Ended December 31, 2015

Radon Tests
Lead Tests

Selling
Price
$290
$230

Units Sold
12,932
15,252

Total
Revenues
$3,750,280
3,507,960
$7,258,240

Expected revenues at the new 2015 prices are $7,258,240, which is lower than the expected 2015 revenues of $7,292,680 if the prices are unchanged. So, if the goal is to maximize sales revenue and if Jim Rouse’s forecasts are reliable, the company should not lower its price for a lead