Question

Activity-Based Budget

Olympus, Inc., manufactures three models of mattresses: the Sleepeze, the Plushette, and the Ultima. Forecast sales for next year are 15,300 for the Sleepeze, 12,510 for the Plushette, and 5,080 for the Ultima. Gene Dixon, vice president of sales, has provided the following information:

1. Salaries for his office (including himself at $64,900, a marketing research assistant at $41,350, and an administrative assistant at $24,450) are budgeted for $130,700 next year.
2. Depreciation on the offices and equipment is $17,100 per year.
3. Office supplies and other expenses total $23,450 per year.
4. Advertising has been steady at $17,750 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 10 percent of first-year Ultima sales for a print and television campaign.
5. Commissions on the Sleepeze and Plushette lines are 5 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 $45 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	$179	12,440		$199	15,300		$199	17,600
Plushette	290	10,380		338	12,510		347	14,380
Ultima	890	1,980		990	5,080		1,210	5,080

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

Research—researching current and future conditions in the industry

Shipping—arranging for shipping of mattresses and handling calls from purchasing agents at retail stores to trace shipments and correct errors

Jobbers—coordinating the efforts of the independent jobbers who sell the mattresses

Basic ads—placing print and television ads for the Sleepeze and Plushette lines

Ultima ads—choosing and working with the advertising agency on the Ultima account

Office management—operating the Sales Division office

The percentage of time spent by each employee of the Sales Division on each of the above activities is given in the following table:

	Gene		Research Assistant		Administrative Assistant
Research	-		70	%	-
Shipping	25	%	-		20	%
Jobbers	20		10		20
Basic ads	-		20		40
Ultima ads	35		-		5
Office management	20		-		15

Additional information is as follows:

1. Depreciation on the office equipment belongs to the office management activity.
2. Of the $23,450 for office supplies and other expenses, $5,200 can be assigned to telephone costs which can be split evenly between the shipping and jobbers' activities. An additional $2,200 per year is attributable to Internet connections and fees, and the bulk of these costs (80 percent) are assignable to research. The remainder is a cost of office management. All other office supplies and costs are assigned to the office management activity.

Required:

1. Prepare an activity-based budget for next year by activity. Use the expected level of sales activity. If required, round answers to the nearest dollar.

Olympus, Inc.
Activity-Based Budget
For Next Year
Research:
	$
		$
Shipping:
	$
Jobbers:
	$
Basic ads:
	$
Ultima ads:
	$
Office management:
	$
Total			$

2. On the basis of the budget prepared in Requirement 1, advise Gene regarding actions that might be taken to reduce expenses.

Answer 1

Olympus, Inc.
Activity-Based Budget
Research:
Salary = 41350 x 70%	$                  28,945.00
Internet connections = 2200 x 80%	$                    1,760.00	$                30,705.00
Shipping:
Salaries ($64900 x 25%) + ($24,450 x 20%)	$                  21,115.00
Telephone = 5200/2	$                    2,600.00
Ship Sleepeze (15,300 x $45)	$               6,88,500.00
Ship Plushette (12510 x $45)	$               5,62,950.00
Ship Ultima (5080 x 70)	$               3,55,600.00	$           16,30,765.00
Jobbers:
Salaries ($64900 x 20%) + (41350 x 10%) + ($24,450 x 20%)	$                  22,005.00
Telephone = 5200/2	$                    2,600.00
Commissions (($199 x 15,300)+($338 x 12510)) x 5%	$               3,63,654.00	$             3,88,259.00
Basic ads:
Salaries   (41350 x 20%) + ($24,450 x 40%)	$                  18,050.00
Advertising	$                  17,750.00	$                35,800.00
Ultima ads:
Salaries ($64900 x 35%) + ($24,450 x 5%)	$                  23,937.50
Advertising (990 x 5080 x 10%)	$               5,02,920.00	$             5,26,857.50
Office management:
Salaries ($64900 x 20%) + ($24,450 x 15%)	$                  16,647.50
Depreciation	$                  17,100.00
Office Supplies = 23450 -5200 - (2200 x 80%)	$                  16,490.00	$                50,237.50
Total		$           26,62,624.00
2. On the basis of the budget prepared in Requirement 1, advise Gene regarding actions that might be taken to reduce expenses.
Gene should focus on the most costly activities: shipping, Ultima advertising and commissions to jobbers.