As part of the process of preparing the master budget for the coming year, you've been asked to perform what-if analyses, in the form of scenarios, on the original planning assumptions regarding Product A produced by your company. The following are the baseline planning data for the coming year for this product:

Sales volume (annual, in units) .................. 2,500

Selling price per unit ............................ $1,500

Variable cost per unit ........................... $1,000

Fixed costs (per year) ........................ $200,000

Required

1. Define what is meant by the terms what-if analysis and scenario analysis.

2. Based on the baseline planning data, what is the budgeted operating income for Product A for the coming year?

3. Determine the estimated operating income under each of the following scenarios (for each scenario you should report both the new budgeted operating income and the percentage change in operating income from the baseline budgeted result):

a. Selling price per unit is 10% higher than planned, while fixed costs per year are also 10% higher than planned.

b. Variable cost per unit is 5% higher than planned, while fixed costs are lower by this same percentage.

c. Selling price per unit is 10% higher than planned, while volume is decreased by 8%.