Question 1

Roles of budget:
1. Budget helps in anticipating future monetary requirements that are required for the growth of the
business.
2. It is used in comparison of the actual performance with the planned performance and taking
corrective actions when necessary.
3. It sets financial targets and departmental objectives.
4. It helps in effective allocation of the resources in various departments and units.
5. Specific goals and figures can assist in motivating employees to improve their work as well as the
results of financial management.

Some commonly described budgeting theories and the pros/cons ascribed to each are as follows:
SN Description Pros Cons
1. Incremental Budgeting: They are Straight forward and May perpetuate
prepared based on the previous very easy to put into inefficiencies.
period’s budget with marginal changes practice.
where there may be additional activity.
2. Zero-based budgeting: Every new Engages the process Requires substantial
budgeting is based on the ‘zero base,’ of critical evaluation managerial effort.
and each function has to justify its of expenditure.
requirements and costs.
3. Activity-based Budgeting: Budgets are Offers keen It is rather complex
prepared from activities, hence setting information on how and calls for a good
emphasis on cost activities or cost different costs are grasp of cost drivers.
drivers. likely to change.

Question 2
Fixed Costs: These are the expenses that are not affected by the level of production or activity of the
business like rent, salaries, and insurance among others.
Variable Costs: These costs are affected by the level of activity, usually sales volume or units of output.
For example; direct material, direct labor and so on.
Segmentation Importance:
1. Supports in cost regulation as well as, provides details for decision-making.
2. The long term strategy is affected by fixed costs while variable costs are important in the short term
management.

Question 3
Direct Costs: Direct costs therefore refers to those cost which are easily identifiable and can be charged
to the direct provision of a product or service.
Indirect Costs: These are the expenses which cannot be allocated to a specific product. These are the
over head expenses of the business and even though they are necessary for the production process to
take place, they cannot be traced to the product.
The types of indirect costs are: Indirect labour, Indirect material and Indirect expenses
Illustrative Example: For a Manufacturing Company:
Direct Costs: costs of the raw material like steel, remunerations for direct employees including assembly
line workers.
Indirect Costs: supplies(indirect material), payment of supervisors(indirect labour) and depreciation of
factory’s machines( indirect expenses).

Question 4
Formula for Calculation of Contribution
Contribution=sales revenue-variable costs
This can be expressed per unit or as a ratio:
Per Unit: Contribution Margin per Unit=Selling Price per Unit−Variable Cost per Unit
Ratio: Contribution Margin Ratio=Contribution Margin/Sales Revenue
Example: For a product with a $50 selling price and $30 variable cost, the contribution margin per unit is
$20, and the ratio is 40%.
Significance:
1. Indicates how much revenue contributes to covering fixed costs and generating profit.
2. Essential for determining the sales volume needed to cover all costs.
3. Guides pricing, product line, and cost control decisions.
4. Helps understand how changes in sales, prices, and costs impact profitability.
5. Indicates how much sales can drop before reaching the break-even point, aiding risk management.

Question 5

a. Breakeven Point:

¿ costs 10,000
¿ units : = =3,334 ducks
selling price−variable cost per unit 5−2
¿ Dollars :3,334 ×5=$ 16,670
b. Required number of sales of ducks for the given Profit Target:

¿ costs+ desired profit 10,000+ 35,000

Required sales : = =15,000 ducks
sellling price−variable cost per unit 5−2
c. Profit Analysis with Increased Sales and Prices:
To determine how much profit Rubber Duck Co would make if it sold 8,000 units (doubling its 4,000
units) at a price of $10 each with costs unchanged, we need to follow these steps:
1. New selling price=$ 10 per unit
2. New units sold ( doubled )=8,000 units
3. Total revenue at new selling price=8,000 × $ 10=$ 80,000
4. Total variable costs=8000× $ 2=$ 16,000
5. Total ¿ costs=$ 10,000
6. Profit=Totalrevenue−Total costs=80,000− (16,000+ 10,000 )=$ 54,000
d. Demand Study Decision: To determine the best course of action for Rubber Duck Co based on the
demand study, we need to compare the potential profits from two scenarios: cutting prices by 15%
and increasing prices by 50%:

Price Total
Total Total
per Units Variable Profit
Scenario Revenue Costs
Unit Sold Costs ($)
($) ($)
($) ($)
Cut Price by 15% (Increase Sales)
19.07% Increase in Sales 4.25 4,763 20,243.75 9,526 19,526 717.75
27.65% Increase in Sales 4.25 5,106 21,700.50 10,212 20,212 1,488.50
Increase Price by 50% (Decrease
Sales)
10.31% Decrease in Sales 7.5 3,588 26,910 7,176 17,176 9,734
14.72% Decrease in Sales 7.5 3,411 25,582.50 6,822 16,822 8,760.50
Conclusion:
The table clearly shows that increasing the price by 50% results in significantly higher profits (ranging
from $8,760.50 to $9,734) compared to cutting the price by 15% (where profits range from $717.75 to
$1,488.50). Thus, the best course of action for Rubber Duck Co is to increase the price by 50%.