Question

Olympus, Inc., manufactures three models of mattresses: the Sleepeze, the Plushette, and the Ultima. Forecast sales for next year are 15,250 for the Sleepeze, 12,700 for the Plushette, and 4,580 for the Ultima. Gene Dixon, vice president of sales, has provided the following information:

Salaries for his office (including himself at $66,500, a marketing research assistant at $35,850, and an administrative assistant at $23,550) are budgeted for $125,900 next year.

Depreciation on the offices and equipment is $19,000 per year.

Office supplies and other expenses total $22,750 per year.

Advertising has been steady at $20,600 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.

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.

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 $186 12,640 $206 15,250 $206 17,540 Plushette 291 10,020 333 12,700 343 13,850 Ultima 850 2,230 920 4,580 1,120 4,580

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 30 % - 20 % Jobbers 15 15 20 Basic ads - 15 35 Ultima ads 25 - 10 Office management 30 - 15

Additional information is as follows: Depreciation on the office equipment belongs to the office management activity.

Of the $22,750 for office supplies and other expenses, $5,400 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.

Answer 1

Olympus, Inc.
Activity-Based Budget
Research:
Salary = 35850 x 70%	$          25,095.00
Internet connections = 2300 x 75%	$            1,725.00	$              26,820.00
Shipping:
Salaries ($66,500 x 30%) + ($23,550 x 20%)	$          24,660.00
Telephone = 5400/2	$            2,700.00
Ship Sleepeze (15,250 x $45)	$       6,86,250.00
Ship Plushette (12700 x $45)	$       5,71,500.00
Ship Ultima (4580 x 70)	$       3,20,600.00	$         16,05,710.00
Jobbers:
Salaries ($66500 x 15%) + (35850 x 15%) + ($23,550 x 20%)	$          20,062.50
Telephone = 5400/2	$            2,700.00
Commissions (($206 x 15,250)+($333 x 12700)) x 3%	$       2,21,118.00	$           2,43,880.50
Basic ads:
Salaries   (35850 x 15%) + ($23,550 x 35%)	$          13,620.00
Advertising	$          20,600.00	$              34,220.00
Ultima ads:
Salaries ($66500 x 25%) + ($23,550 x 10%)	$          18,980.00
Advertising (920 x 4580 x 15%)	$       6,32,040.00	$           6,51,020.00
Office management:
Salaries ($66500 x 30%) + ($23550 x 15%)	$          23,482.50
Depreciation	$          19,000.00
Office Supplies = 22750 -5400 - (2300 x 75%)	$          15,625.00	$              58,107.50
Total		$         26,19,758.00