Budget Schedules Sensitive Analysis and Recommendation

Memorandum

DATE:          May 5, 2015

TO:        Beth Davies-Lowry

SUBJECT:  Budget schedules sensitive analysis and recommendation

Scope and objective

I have done a comprehensive research of your Global Electronics Company according to the budget schedules. The purpose of this memorandum is to offer you the resources that the company need to determine the best movement to make. In addition, I hope the analysis of the relationship between budgets and sales assist you realize the operational status of your firm. I will discuss the budget progress under three different cases.

Sensitivity analysis

In case 1, I assume that if credit sales were 50% of total sales, rather than 75% and inventory at end of each month equal to 40% of next month’s projected cost of goods sold, as the big drop of sales budget, the cash budget increase a lot, but it ends up with a $58,240 total assets loss. In case 2, I change the credit sale from 10% to 20% and purchase paid rise from 40% to 50%, the outcome shows the cash budget has a slightly increase, however, the total assets still has a $15,736 gap from original, it is because the total cash collections from credit sales decrease. In case 3, I modify the equipment purchases required a $230,000 investment instead of $250,000, this action makes a $20,625 cash increase alone with a $ 625 up in total assets. Based on the above three cases, we could easily find that sales percentage change makes the cash revenue go up, but those actions would not add the value of total assets. If we try another way to make equipment purchases go down, the result of income increase is obvious.  

Management Strategy

If any changes occur, the priority action to maintain a good standing of financial status is to cut cost, include equipment purchases and any other relates cost. Sales increase would bring much more money spend on inventory, it might not send profitable outcome if company fail to manage the cost process.

Recommendation

Based on my research, I strongly recommend case 3 to you; it will lower your cost and higher your net income. Sales percentage change brings you both better cash income and massive additional cost; it will not follow the rule to raise the net income for higher profit.