(Coping with uncertainty) After reviewing financial results for 2005, Midtown Industrial’s President sent the following e-mail to his CFO and Controller, Ja¬ son Sharp.

DearJason:

I'm disappointed in the financial results for the yearjust completed. As you know, profits were $2 million below budget. In comparing the actual results to the budget, I note that the cost of natural gas exceeded budget by almost $1.3 million, and that cost alone accounts for 65% of the profit deficiency. This is the second year in a row that energy costs have dramatically reduced profits. I am calling a meeting on Tuesday to review ourfinancial results, and I would like you to offer a presentation on the following topics:

1. Why our estimates of energy costs have been dramatically below actual costs.

2. What actions you intend to take to improve our ability to estimate these costs.

3. What actions the company could take to better manage these costs.

As the most recent hire in the Financial Department of Midtown Industrial, Sharp has asked you for help.

a. What suggestions will you give Sharp to improve the estimates of en¬ ergy costs for future budgeting cycles?

b. What suggestions will you give Sharp to improve the management of energy costs in the future?

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