Question

1. Ted has just purchased a small honey manufacturing company that was having financial difficulties. Ted has asked you about the financial difficulties of the company. After a brief operating period, you decided that the company's main problem was the lack of any financial planning. The company made a good product and market potential was great.

Required:

a. Briefly explain to Ted why a company needs a good budget plan. Explain at least three benefits of a good budget.

b. Shirley, the marketing manager of the company, has been asked to estimate how many bottles of honey can be sold during 2014. The local economy has been growing, and the company has experienced a 10% increase in the number of bottles sold over each of the past five years. In 2013, the company had sold 200,000 bottles. Shirley is paid a bonus of $20,000 if she achieves the budgeted sales. Shirley decided to submit a budget of 180,000 bottles sold for 2014.

   Do you think Shirley budget is correct? Identify the behavior issue involved in the budget. Briefly discuss the negative aspects of this behavior.

c. The company plans to sell 10,000 units of finished product in July and anticipate a growth rate in sales of 5 percent per month, the desired monthly ending inventory in units of finished product is 80 percent of the next month’s estimated sales. Compute the company’s budgeted production in units for August.

Answer 1