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Hello John,
I was wondering if there are lectures that explains budgets like zero-based, activity based and incremental budgeting.
And thank you for the lectures, very helpful.
Sleyim
Yes there are – there are lectures on all the relevant topics.
Look at the free Lecture Notes (there is no point in watching the lectures without having the notes in front of you). You will find a chapter on budgeting and on the list of lectures you will find a lecture that goes with it.
(The best is to work through the chapters and lectures in order – then you will have covered everything you need for Paper F5!).
Hi John,
The following question was deemed as true.
A price in excess of full cost plus per unit will ensure that a company will cover all its costs and make a profit.
Isn’t it not true, since there are various methods in which fixed costs can be allocated to the unit cost giving different allocation amounts?
Moreover,regarding elasticity of demand,
Why is the following statement incorrect? :
When elasticity of demand is very inelastic customers are not sensitive to either price or advertising and sales promotion activities.
Thank you in advance
Hi Marylise,
I am not sure, I may be wrong.
Regarding your first question what it means if your full cost per unit is $10 and you have a selling price per unit of more than $10, say $12, then yes the company will cover all costs and make a profit of $2. Moreover, it doesn’t matter how the fixed costs are allocated, the $10 includes the FULL cost.
Regarding your second question, when elasticity of demand is inelastic it automatically means no matter what you do, you wont be able to persuade people to buy more of your product (customers are not sensitive to any change). For instance, if you decrease the price to get people to buy more they will not buy as much as you hoped. I think a good example would be vegetables, no one is actually going to buy than their normal usage just because price went down.
I hope that clears it.
Regards,
Sleyim***no one is actually going to buy MORE than their normal usage just because price went down.
Hi Sleyim,
Thank you for your feedback, however I’de like to wait for John’s reply to be 100% sure 🙂
Marylise
Sleyim: Please don’t answer in this forum – it is Ask the Tutor and you are not the tutor 🙂
Marylise:
First question:
The question is actually a bit confusing and I understand your confusion 🙂
If the selling price is more than the actual full cost, then certainly they will make a profit. The reason it is a bit confusing is that usually we base the selling price on the budgeted full cost, and fixed overheads have then been absorbed based on the budgeted production. If the production turns out to be less than budgeted (because demand is lower) then the total fixed cost will not reduce – in that case they might not end up making a profit.
Second question:
When demand is very inelastic it means that they are not affected by changes in the price. However, they can still be affected by advertising and sales promotion activities – that is why the statement as a whole is incorrect.
Thank you so much 🙂
Keep up the great service and prompt replies.
Enjoy the rest of your day 🙂
Marylise
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