Question

Activity-Based Budget

Olympus, Inc., manufactures three models of mattresses: the Sleepeze, the Plushette, and the Ultima. Forecast sales for next year are 15,510 for the Sleepeze, 12,120 for the Plushette, and 5,430 for the Ultima. Gene Dixon, vice president of sales, has provided the following information:

1. Salaries for his office (including himself at $66,650, a marketing research assistant at $44,000, and an administrative assistant at $23,900) are budgeted for $134,550 next year.
2. Depreciation on the offices and equipment is $17,800 per year.
3. Office supplies and other expenses total $20,600 per year.
4. Advertising has been steady at $19,450 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 $50 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	$174	12,800		$189	15,510		$189	18,010
Plushette	300	10,290		351	12,120		366	13,880
Ultima	860	1,820		960	5,430		1,140	5,430

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	%	-		20	%
Jobbers	20		15		20
Basic ads	-		10		35
Ultima ads	25		-		5
Office management	25		-		20

Additional information is as follows:

1. Depreciation on the office equipment belongs to the office management activity.
2. Of the $20,600 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 $2,300 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:
	$
		$
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

Part 1

Activity-based budget:

Research:
Salary	33000 (44000*75%)
Internet connections	1725 (2300*75%)	34725
Shipping:
Salaries	24775 (66650*30%)+(23900*20%)
Telephone	2600 (5200/2)
Ship Sleepeze	775500 (15510*50)
Ship Plushette	606000 (12120*50)
Ship Ultima	380100 (5430*70)	1788975
Jobbers:
Salaries	24710 ((66650*20%)+(44000*15%)+(23900*20%))
Telephone	2600 (5200/2)
Commissions	431131 ((15510*189)+(12120*351))*6%)	458441
Basic ads:
Salaries	12765 ((44000*10%)+(23900*35%))
Advertising	19450	32215
Ultima ads:
Salaries	17858 ((66650*25%)+(23900*5%))
Advertising	781920 ((5430*960)*15%)	799778
Office management:
Salaries	21443 ((66650*25%)+(23900*20%))
Depreciation	17800
Office Supplies	13675 (20600-5200-1725)	52918
Total		3167052

Part 2

The above calculation states the shipping is the most costly activity among all. Next to it in terms of expensive activities are Ultima advertising and commissions to jobbers. Thus it is advisable to investigate shipping costs and try to control them. It is difficult to reduce the Ultima advertising in the very first year. it can make use of direct selling to retail stores by making used of salaried sales staff and cut the advertising cost.