The Sales Budget And CVP Analysis Lo1 2 Cnx Motors Is Prepar

24 The Sales Budget And Cvp Analysis Lo1 2 Cnx Motors Is Preparing A

CNX Motors is preparing a sales budget for the current year for the service department, based on last year’s actual amounts. Management is interested in understanding potential outcomes if there is an increase in sales volume (mechanic hours) or in the average revenue per mechanic hour, noting that it is unlikely both will increase simultaneously due to economic conditions.

Last year's sales data included mechanic hours and total revenues for each month:

• January: 1,174 hours, $11,681
• February: 1,057 hours, $10,538
• March: 1,125 hours, $11,261
• April: 1,516 hours, $15,008
• May: 1,724 hours, $16,981
• June: 2,515 hours, $25,014
• July: 2,746 hours, $27,185
• August: 3,107 hours, $30,604
• September: 2,421 hours, $23,823
• October: 2,211 hours, $22,154
• November: 1,709 hours, $17,090
• December: 1,524 hours, $15,125

Question A: Compute the average revenue per mechanic hour for last year.

To determine the average revenue per mechanic hour, sum total revenues and total mechanic hours for the year, then divide total revenue by total hours:

Total mechanic hours = 1,174 + 1,057 + 1,125 + 1,516 + 1,724 + 2,515 + 2,746 + 3,107 + 2,421 + 2,211 + 1,709 + 1,524 = 22,839 hours

Total revenue = \$11,681 + \$10,538 + \$11,261 + \$15,008 + \$16,981 + \$25,014 + \$27,185 + \$30,604 + \$23,823 + \$22,154 + \$17,090 + \$15,125 = \$226,784

Average revenue per mechanic hour = Total Revenue / Total Hours = \$226,784 / 22,839 ≈ \$9.93

Hence, the average revenue per mechanic hour last year was approximately $9.93.

Question B: Prepare a monthly sales budget assuming a 10% increase in mechanic hours with constant revenue per hour.

In this scenario, each month’s mechanic hours increase by 10%, while the revenue per hour remains at \$9.93. The calculation for each month’s budgeted hours and revenue is as follows:

Question C: Prepare a monthly sales budget assuming a 5% increase in revenue per hour with mechanic hours unchanged.

Here, the mechanic hours are assumed to stay exactly the same as last year, but the revenue per hour increases by 5%. The calculations are:

New revenue per hour = \$9.93 × 1.05 ≈ \$10.42

Monthly budgeted revenue = Last year’s mechanic hours × \$10.42

Question D: Total impact comparison—which scenario is more advantageous?

Comparing the total projected revenues for the year under both scenarios provides insight into which is more beneficial financially. Under the 10% increase in mechanic hours, the total revenue is approximately:

Sum of B: \$12,835 + \$11,536 + \$12,298 + \$16,565 + \$18,834 + \$27,491 + \$30,004 + \$33,927 + \$26,447 + \$24,155 + \$18,689 + \$16,648 ≈ \$264,424

Under the 5% increase in revenue per hour, total revenue is approximately:

Sum of C: \$12,226 + \$11,012 + \$11,729 + \$15,790 + \$17,981 + \$26,188 + \$28,623 + \$32,351 + \$25,236 + \$23,037 + \$17,804 + \$15,880 ≈ \$234,887

Therefore, increasing sales volume by 10% yields a higher total revenue (\$264,424) than increasing the revenue per hour by 5% (\$234,887). This suggests that, from a purely revenue standpoint, focusing on increasing mechanic hours is more advantageous, assuming variable and fixed costs are consistent across scenarios. Nonetheless, the choice should also consider capacity constraints, cost structures, and market conditions, as higher mechanic hours may incur additional costs (such as labor or equipment wear), while increasing revenue per hour might be achieved through premium pricing or value-added services.

Conclusion

In conclusion, the analysis indicates that a 10% increase in mechanic hours maximizes total revenues more effectively than a 5% increase in revenue per mechanic hour given the last year's data. Managers should thus consider strategies that expand mechanic hours, such as marketing campaigns or expanding service capacity, provided such increases do not disproportionately raise variable costs. Conversely, efforts to increase revenue per mechanic hour could be pursued through service differentiation or price adjustments, though the revenue impact appears less substantial in this scenario. Ultimately, strategic decisions should be grounded in cost analysis, market capacity, and long-term financial goals.

References

• Anthony, R., & Govindarajan, V. (2014). Management Control Systems. McGraw-Hill Education.
• Drury, C. (2013). Management and Cost Accounting. Cengage Learning.
• Horngren, C. T., Datar, S. M., & Rajan, M. (2012). Cost Accounting: A Managerial Emphasis. Pearson.
• Hilton, R. W., & Platt, D. (2013). Managerial Accounting: Creating Value in a Dynamic Business Environment. McGraw-Hill Education.
• Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting. McGraw-Hill Education.
• Kaplan, R. S., & Atkinson, A. A. (2015). Advanced Management Accounting. Pearson.
• Needles, B. E., & Powers, M. (2014). Financial Accounting. Cengage Learning.
• Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Financial & Managerial Accounting. Wiley.
• Reeve, J. M., & Ward, E. J. (2019). Principles of Management Accounting. Routledge.
• OECD. (2017). Cost Management and Pricing Strategies in Service Industries. Organisation for Economic Co-operation and Development.