Question

Olympus, Inc., manufactures three models of mattresses: the Sleepeze, the Plushette, and the Ultima. Forecast sales for next year are 15,000 for the Sleepeze, 12,000 for the Plushette, and 5,000 for the Ultima. Gene Dixon, vice president of sales, has provided the following information:

Salaries for his office (including himself at $65,000, a marketing research assistant at $40,000, and an administrative assistant at $25,000) are budgeted for $130,000 next year.

Depreciation on the offices and equipment is $20,000 per year.

Office supplies and other expenses total $21,000 per year.

Advertising has been steady at $20,000 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 5 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 $50 per unit sold. Gene expects the Ultima line to ship for $75 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	$180	12,500		$200	15,000		$200	18,000
Plushette	300	10,000		350	12,000		360	14,000
Ultima	900	2,000		1,000	5,000		1,200	5,000

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	15	10	20
Basic ads	—	15	40
Ultima ads	30	—	5
Office management	25	—	15

Additional information is as follows:

Depreciation on the office equipment belongs to the office management activity.

Of the $21,000 for office supplies and other expenses, $5,000 can be assigned to telephone costs which can be split evenly between the shipping and jobbers' activities. An additional $2,400 per year is attributable to Internet connections and fees, and the bulk of these costs (80 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.

Olympus, Inc.
Activity-Based Budget
For Next Year
Research:
Salaries	$
Internet connections		$
Shipping:
Salaries	$
Telephone
Ship Sleepeze
Ship Plushette
Ship Ultima
Jobbers:
Salaries	$
Telephone
Commissions
Basic ads:
Salaries	$
Advertising
Ultima ads:
Salaries	$
Advertising
Office management:
Salaries	$
Depreciation
Office Supplies
Total			$

Answer 1

Olympus, Inc.
Activity-Based Budget
For Next Year
Research:
Salaries	$      30,000
Internet connections	1,920	$         31,920		(2400 x 80%)
Shipping:
Salaries	$      24,500
Telephone	2,500			(5000 x 50%)
Ship Sleepeze	750,000			(15000 x $50)
Ship Plushette	600,000			(12000 x $50)
Ship Ultima	375,000	1,752,000		(5000 x $75)
Jobbers:
Salaries	$      18,750
Telephone	2,500			(5000 x 50%)
Commissions	360,000	381,250		(15000 x 200+12000 x 350) x 5%
Basic ads:
Salaries	$      16,000
Advertising	20,000
Ultima ads:		36,000
Salaries	$      20,750			(5000 x $1000) x 15%
Advertising	750,000	770,750
Office management:
Salaries	$      20,000
Depreciation	20,000
Office Supplies	14,080	54,080		(21000-5000-2400)+2400 x 20%
Total			$ 3,026,000

Salaries classification
	65000		40000		25000
	Gene		Research		Administrative
			Assistant		Assistant		Total
Research	—		75%	30,000	—		30,000
Shipping	30%	19,500	—		20%	5,000	24,500
Jobbers	15	9750	10	4000	20	5,000	18,750
Basic ads	—		15	6000	40	10,000	16,000
Ultima ads	30	19500	—		5	1,250	20,750
Office management	25	16250	—		15	3,750	20,000