Question

Activity-Based Budget

Olympus, Inc., manufactures three models of mattresses: the Sleepeze, the Plushette, and the Ultima. Forecast sales for next year are 15,410 for the Sleepeze, 12,580 for the Plushette, and 5,490 for the Ultima. Gene Dixon, vice president of sales, has provided the following information:

1. Salaries for his office (including himself at $66,450, a marketing research assistant at $37,250, and an administrative assistant at $26,000) are budgeted for $129,700 next year.
2. Depreciation on the offices and equipment is $18,100 per year.
3. Office supplies and other expenses total $20,650 per year.
4. Advertising has been steady at $22,100 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 20 percent of first-year Ultima sales for a print and television campaign.
5. Commissions on the Sleepeze and Plushette lines are 4 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	$183	12,270		$199	15,410		$199	17,830
Plushette	306	9,570		363	12,580		373	14,160
Ultima	930	2,080		1,000	5,490		1,220	5,490

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	35	%	-		20	%
Jobbers	10		10		20
Basic ads	-		20		30
Ultima ads	25		-		5
Office management	30		-		25

Additional information is as follows:

1. Depreciation on the office equipment belongs to the office management activity.
2. Of the $20,650 for office supplies and other expenses, $4,800 can be assigned to telephone costs which can be split evenly between the shipping and jobbers' activities. An additional $2,800 per year is attributable to Internet connections and fees, and the bulk of these costs (85 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

Answer 1.
Allocation of Cost
Particulars	Total	Apportion Ratio	Research	Shipping	Jobbers	Basic Ads	Ultima Ads	Office Mgt
Salaries of Office
Gene	66450	0:35:10:0:25:30	0	23257.5	6645	0	16612.5	19935
Marketing Research	37250	70:0:10:20:0:0	26075	0	3725	7450	0	0
Administrative Activity	26000	0:20:20:30:5:25	0	5200	5200	7800	1300	6500
Depreciation	18100		0	0	0	0	0	18100
Office Supplies andOther Expenses
Telephone Cost	4800			2400	2400
Internet Connection and fees	2800		2380					420
Others	13050							13050
Total	168450		28455	30857.5	17970	15250	17912.5	58005
Activity Based Budget for Next Year
Particulars	Total	Basis of Allocation	Sleepeze	Plushette	Ultima
Sales Unit	33,480.00		15,410.00	12,580.00	5,490.00
Sales Price per Unit			199.00	363.00	1,000.00
Total Sales	1,31,23,130.00	Unit * Price	30,66,590.00	45,66,540.00	54,90,000.00
Advertising Cost	11,20,100.00	As given	8,878.62	13,221.38	10,98,000.00
Commission Cost	5,24,925.20	4% of Sales	1,22,663.60	1,82,661.60	2,19,600.00
Research Cost	28,455.00	EquallyDistributed	9,485.00	9,485.00	9,485.00
Shipping Cost	30,857.50	On the basis of Sales unit	3,931.27	7,171.11	19,755.12
Jobbers ( On the basis of Sales)	17,970.00	On the basis of Sales Ratio	4,199.20	6,253.14	7,517.67
Basic Ads	15,250.00	On the basis of Sales Ratio	6,126.65	9,123.35	-
Ultima Ads	17,912.50	As calculated	-	-	17,912.50
Office Management	58,005.00	On the basis of Sales Ratio	13,554.51	20,184.37	24,266.12
Expected Profit	1,13,09,654.80		28,97,751.16	43,18,440.05	40,93,463.59
Answer 2.
Sale of ultima at optimistic level increase overall profitability.