Question

Activity-Based Budget

Olympus, Inc., manufactures three models of mattresses: the Sleepeze, the Plushette, and the Ultima. Forecast sales for next year are 15,600 for the Sleepeze, 12,700 for the Plushette, and 5,100 for the Ultima. Gene Dixon, vice president of sales, has provided the following information:

1. Salaries for his office (including himself at $64,250, a marketing research assistant at $36,350, and an administrative assistant at $25,650) are budgeted for $126,250 next year.
2. Depreciation on the offices and equipment is $18,550 per year.
3. Office supplies and other expenses total $23,350 per year.
4. Advertising has been steady at $19,400 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 3 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 $80 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	$173	12,700		$188	15,600		$188	17,960
Plushette	302	10,130		349	12,700		363	14,440
Ultima	890	2,170		980	5,100		1,200	5,100

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	-		75	%	-
Shipping	30	%	-		15	%
Jobbers	10		10		25
Basic ads	-		15		40
Ultima ads	35		-		5
Office management	25		-		15

Additional information is as follows:

1. Depreciation on the office equipment belongs to the office management activity.
2. Of the $23,350 for office supplies and other expenses, $4,600 can be assigned to telephone costs which can be split evenly between the shipping and jobbers' activities. An additional $2,300 per year is attributable to Internet connections and fees, and the bulk of these costs (75 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:
Salaries	$
Internet connections		$
Shipping:
Salaries	$
Telephone
Ship Sleepeze
Ship Plushette
Ship Ultima
Jobbers:
Salaries	$
Telephone
Commissions
Basic ads:
Salaries	$
Advertising
Ultima ads:
Salaries	$
Advertising
Office management:
Salaries	$
Depreciation
Office Supplies
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

Answer
Activity based budget
Research
Salary	$              27,263
Internet connections	$                1,725	$                28,988
Shippping
Salaries	$              23,123
Telephone	$                2,300
Ship Sleezze	$            702,000
Ship Plushette	$            571,500
Ship Ultime	$            408,000	$          1,706,923
Jobbers
Salaries	$              16,473
Telephone	$                2,300
Commissions	$            220,953	$              239,726
Basic ads:
Salaries	$              15,713
Advertising	$              19,400	$                35,113
Ultima ads:
Salaries	$              23,770
Advertising	$            499,800	$              523,570
Office management
Salaries	$              19,910
Depriciation	$              18,550
Office supplies	$              17,025	$                55,485
Total			$          2,589,803
ANSWER-2
Clearly, shipping is the most costly activity, followed by Ultima advertising and commissions to jobbers. It would be worthwhile to investigate shipping costs to see if those could be reduced, for example, by getting bids from several shippers. It is unlikely that Ultima advertising should be reduced the first year. It is a very different, and expensive, model, and consumers may need to be educated as to its benefits. Another method of selling to retail stores might be worth investigating, for example, the use of a salaried sales staff

Workings:

Notes
	Pessimistic		Expected		Optimistic
	Price	Quantity	Price	Quantity	Price	Quantity
Sleepeze	$173	12,700	$188	15,600	$188	17,960
Plushette	302	10,130	349	12,700	363	14,440
Ultima	890	2,170	980	5,100	1,200	5,100
	Pessimistic	Expected	Optimistic
Sleepeze	$        2,197,100	$          2,932,800	$          3,376,480
Plushette	$        3,059,260	$          4,432,300	$          5,241,720
Ultima	$        1,931,300	$          4,998,000	$          6,120,000
total sales	$        7,187,660	$        12,363,100	$        14,738,200
	Pessimistic	Expected	Optimistic
Salaries	$            126,250	$              126,250	$              126,250
Depriciation	$              18,550	$                18,550	$                18,550
Offices supplies & other	$              23,350	$                23,350	$                23,350
Advertising:
Sleepeze & Plushette	$              19,400	$                19,400	$                19,400
Ultima(10%)	$            193,130	$              499,800	$              612,000
Commissions(3%)	$      157,690.80	$              220,953	$              258,546
Shipping
Sleepeze(45)	$            571,500	$              702,000	$              808,200
Plushette(45)	$            455,850	$              571,500	$              649,800
Ultima(80)	$            173,600	$              408,000	$              408,000
Total	$        1,739,321	$          2,589,803	$          2,924,096