Discuss the capital budgeting process, and include the following:
- Investment opportunities
- Data needed
- Decision making
Organizations use a capital budget in order to determine the long-term investments they will make with the goal of increasing profits and minimizing costs. When looking at several different investment opportunities, companies use the capital budget to compare each investment and the period in which each will start generating profits on the funds capitalized and eventually choosing the investment with the highest expected rate of return. This budget can also help determine the level of risk associated with each investment opportunity, ...
This solution includes a detailed explanation of the capital budgeting process along with some of the reasons why organizations use capital budgeting. The solution contains 340 words of text.
Analysis of Profitability & Capital Budgeting: Hersheys 2008 Operating Budget
The objective of Part I is for the student to become familiar with the cost-volume-profit analysis as a tool used for decision making. Review the "Consolidated Statements of Income" In Hershey's 2007 annual report (ignore all figures below net income, such as, per share information). Using the spreadsheet below fill in requirements 1 through 4 in the spreadsheet using the following data:
1. Units Sold
a. 2005 - 100,000,000 units
b. 2006 - 100,400,000 units
c. 2007 - 200,000,000 units
2. Variable Manufacturing Costs Percentage - 45% of Cost of Sales
3. Variable Marketing Costs Percentage - 15% of Cost of Sales
4. Fixed Costs Percentage - 40% of Cost of Sales
The objective of Part II is for the student to become familiar with the budget concepts as a tool used for decision making. There are primarily two types of Budgets; strategic and operational. Strategic budgets are more long term planning; operational budgets are short term. Either budget follows a process of compilation and revision. Revision is caused by feedback from those who are responsible for implementing the budget. The budget compilation process begins with developing a Master Budget. The Master Budget includes the operational and financial plans of the organization. Budgets are used to coordinate, communicate, and motivate managers and employees. Since this course is focused on managerial analysis, we will couch our discussion in the operational budget process. The following items will be assessed in particular:
1. Review the analysis of the "Consolidated Statements of Income" in Hershey's 2007 annual report completed in the Part I. In a 2 to 3 page written report, using the data requirements in 2 and 3 of Part I, create a hypothetical operational budget for 2008.
2. Evaluate and discuss the assumptions you made to compile the hypothetical operation budget. The changes made should take into consideration the "What if?" in the requirement 4 section.