Olympus, Inc., manufactures three models of mattresses: the Sleepeze, the Plushe

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:

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:

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.

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

Explanation / Answer

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

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