Question

Activity-Based Budget

Olympus, Inc., manufactures three models of mattresses: the Sleepeze, the Plushette, and the Ultima. Forecast sales for next year are 15,350 for the Sleepeze, 12,280 for the Plushette, and 5,400 for the Ultima. Gene Dixon, vice president of sales, has provided the following information:

1. Salaries for his office (including himself at $65,000, a marketing research assistant at $41,400, and an administrative assistant at $27,450) are budgeted for $133,850 next year.
2. Depreciation on the offices and equipment is $22,750 per year.
3. Office supplies and other expenses total $23,500 per year.
4. Advertising has been steady at $22,850 per year. However, the Ultima is a new product and will require extensive advertising to educate consumers on the unique features of this high-end mattress. Gene believes the company should spend 15 percent of first-year Ultima sales for a print and television campaign.
5. Commissions on the Sleepeze and Plushette lines are 6 percent of sales. These commissions are paid to independent jobbers who sell the mattresses to retail stores.
6. Last year, shipping for the Sleepeze and Plushette lines averaged $55 per unit sold. Gene expects the Ultima line to ship for $70 per unit sold since this model features a larger mattress.

Suppose that Gene is considering three sales scenarios as follows:

Pessimistic			Expected			Optimistic
	Price	Quantity		Price	Quantity		Price	Quantity
Sleepeze	$183	12,330		$205	15,350		$205	17,830
Plushette	294	9,980		352	12,280		361	13,960
Ultima	900	1,860		1,000	5,400		1,180	5,400

Suppose Gene determines that next year's Sales Division activities include the following:

Research—researching current and future conditions in the industry

Answer 1

Scenarios		Pessimistic
Sales Revenue Budget
Product Line	Sleepeze	Plushette	Ultima	Total
Unit Sold	12,330	9,980	1,860
Multiply: Selling Price per unit	$                    183	$                    294	$                    900
Sales Revenue	$        2,256,390	$        2,934,120	$        1,674,000	$          6,864,510
Flexible expense budget
Product Line	Sleepeze	Plushette	Ultima	Total
Salaries				$              133,850
Depreciation Expense				$                22,750
Office supplies and other expenses				$                23,500
Common Advertisement				$                22,850
Advertisement for Ultima (Sales Revenue of Ultima*15%)			$            251,100	$              251,100
Commissions (Sales Revenue *6%)	$            135,383	$            176,047		$              311,431
Shipping Expense (For Sleepeze and Plushette = Unit Sold* $55) (For Ultima = Unit Sold* $70)	$            678,150	$            548,900	$            130,200	$          1,357,250
Total Expense				$          2,122,731

Scenarios		Expected
Sales Revenue Budget
Product Line	Sleepeze	Plushette	Ultima	Total
Unit Sold	15,350	12,280	5,400
Multiply: Selling Price per unit	$                    205	$                    352	$                1,000
Sales Revenue	$        3,146,750	$        4,322,560	$        5,400,000	$        12,869,310
Fexible expense budget
Product Line	Sleepeze	Plushette	Ultima	Total
Salaries				$              133,850
Depreciation Expense				$                22,750
Office supplies and other expenses				$                23,500
Common Advertisement				$                22,850
Advertisement for Ultima (Sales Revenue of Ultima*15%)			$            810,000	$              810,000
Commissions (Sales Revenue *6%)	$            188,805	$            259,354		$              448,159
Shipping Expense (For Sleepeze and Plushette = Unit Sold* $55) (For Ultima = Unit Sold* $70)	$            844,250	$            675,400	$            378,000	$          1,897,650
Total Expense				$          3,358,759

Scenarios		Optimistic
Sales Revenue Budget
Product Line	Sleepeze	Plushette	Ultima	Total
Unit Sold	17,830	13,960	5,400
Multiply: Selling Price per unit	$                    205	$                    361	$                1,180
Sales Revenue	$        3,655,150	$        5,039,560	$        6,372,000	$        15,066,710
Fexible expense budget
Product Line	Sleepeze	Plushette	Ultima	Total
Salaries				$              133,850
Depreciation Expense				$                22,750
Office supplies and other expenses				$                23,500
Common Advertisement				$                22,850
Advertisement for Ultima (Sales Revenue of Ultima*15%)			$            955,800	$              955,800
Commissions (Sales Revenue *6%)	$            219,309	$            302,374		$              521,683
Shipping Expense (For Sleepeze and Plushette = Unit Sold* $55) (For Ultima = Unit Sold* $70)	$            980,650	$            767,800	$            378,000	$          2,126,450
Total Expense				$          3,806,883