Julie Welk, Head of Finance Calls you into her office and says: The Directors have been looking
Question:
Julie Welk, Head of Finance Calls you into her office and says:
The Directors have been looking at the draft budget for the new PEXECO production facility for the 4th month period September to December selling prices were reduced by 10%, sales volumes would increase by 30%.
Mia Schmied, Managing Director, is far less confident that sales would increase as much as Ben believes. She has requested that we perform sensitivity analysis and also consider expected values. I prefer “What If” to sensitivity analysis and have produced profit estimates based on Ben’s assumptions. I think that there is likely to be an increase in fixed costs when volumes increase by more than 20% so my profit estimates also include the effect of this. I have also estimated probabilies so that I could calculate expected values.
There has also been some discussion amongst the directors about the fixed production overheads included in the budget for the new production facility. Whilst some overhead expenditures, such as depreciation, have been easy to predict, other overheads, such as machinery maintenance are more dificult. Within the new facility it is planned that each piece of machinery will have a routine service 3 times a year to ensure that it is in optimal condition. In addition, maintenance employees will be required to make repairs as and when the arises.
Diane Rechnung, Finance Director, has suggested the use of activity-based budgeting as a different approach for establishing some of the overhead expenditure budgets. She has asked for me to look into this.
I have included the “What-If” analysis and the expected value tables in a schedule I will give to you shortly. I would like you to prepares a briefing paper for the senior management team which explains:
- The revised profit figures shown in Table 1 of my schedule and why “What If” analysis is more appropriate than sensitivity analysis in this situation. (36%)
Project Management Achieving Competitive Advantage
ISBN: 978-0132664158
3rd edition
Authors: Jeffrey K. Pinto