Budget sensitivity analysis, strategic and operating plans, business risks

Jordan, the owner of Unique Sinks, realizes that if he withdraws the full amount of dividend, and if the slump in housing starts continues into the next year, he may need to borrow more money than he can easily repay. He would like to alter strategies or operating plans during the fourth quarter so that he could pay at least a $50,000 dividend and end the year with $300,000 in cash to cover potential shortfalls in the next year. Refer to the data and solution for the fourth-quarter flexible budget developed in Self-Study Problem 1 (pages 398-400). The Excel spreadsheet solution to the Self-Study Problem is available on the Wiley Web site at www.wiley.com/college/eldenburg.

A. Modify the assumptions and perform sensitivity analyses to identify a set of cost reductions and/or payment deferrals that would allow Jordan to meet his goals. Leave all other assumptions unchanged.

1. List the changes in your final sensitivity analysis, and explain why you chose this set of changes.

2. Briefly explain what Jordan would need to do to implement each of these changes.

3. List several business risks or other factors that could influence whether the company would be able to achieve the desired results.

B. Return to the original assumptions. Now modify the assumptions and perform sensitivity analyses to determine what changes to volumes, prices, and/or customer collection patterns would provide the desired dividend. Leave all other assumptions unchanged.

1. List the changes in your final sensitivity analysis, and explain why you chose this set of changes.

2. Briefly explain what Jordan would need to do to implement each of these changes.

3. List several factors that could influence whether the company would be able to achieve the desired results.

C. Write a memo to Jordan providing him with your recommendation for a best overall solution. Also explain to Jordan the limitations of your recommendation.