Question

9. You are the sales manager responsible for achieving your company’s sales budget. You are askedto estimate sales for next year as the starting point in the company’s budget process. Last year’ssales were $12 million and you know that the board of directors is looking for an annual increase of10% at constant selling prices. You know that this sales increase will be difficult to achieve withoutdropping prices due to intense competition. Your annual performance bonus is based on 2% of salesup to the agreed budget level and 5% of sales over and above the agreed budget. Plan how you mightapproach your meeting with the managing director to discuss your sales budget for next year.

10. You are the accountant for the company described in question 9 above. How would you advise the managing director in relation to his negotiations with the sales manager over next year’s budget?

E7.1   A company’s annual sales budget is for 120 000 units spread equally through the year. It needs tohave one-and-a-half months’ inventory at the end of each month. Each unit purchased costs $15and is sold for $25. If opening inventory is 12 000 units, calculate the budgeted cost of purchases inthe first month of the budget year.

Answer 1

1	Advice
		Sales-Last Year	Agreed Target
	Sales	12,000,000	13,200,000
			(12,000,000 X 1.10)
	If Sales is < 13,200,000
	Commission-Max	264,000
	If Sales is > 13,200,000
	Commission-Minimum	660,000
2	Annual sales	120,000
		Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec	Total
	Opening Inventory	12,000	15,000	15,000	15,000	15,000	14,999	14,996	14,988	14,963	14,889	14,667	14,000
	Purchase	10,000	10,000	10,000	10,000	9,999	9,997	9,992	9,975	9,926	9,778	9,333	8,000	117,000
													(12000/1.5)
	sales	10,000	10,000	10,000	10,000	10,000	10,000	10,000	10,000	10,000	10,000	10,000	10,000
	Closing Inventory	15,000	15,000	15,000	15,000	14,999	14,996	14,988	14,963	14,889	14,667	14,000	12,000
		Units	Rate	Amount
	Cost of Purchase	117,000	15	1,755,000