Question:
The manager of Buff's Buffet is preparing next year's budget. She wants to prepare a flexible budget for three different annual revenue levels using a contribution margin income statement. Three levels of sales revenue are to be used: $800,000, $900,000, $1,000,000. The following information is available to help in preparing the flexible budget.
Food cost averages 40% of sales revenue.
Variable labor costs average 25% of sales revenue.
Fixed labor cost is $60,000 annually, and other fixed costs are $120,000.
Other variable costs average 12% of sales revenue. Income tax rate is estimated to be 30% on operating income (before tax).
From this information, prepare Buff's flexible three-level budget using the contribution margin method. Also calculate the breakeven sales.
Comment on the results of each budget level with particular reference to the effect of higher sales on net income (after tax).