Activity-Based Budget

Olympus, Inc., manufactures three models of mattresses: the Sleepeze, the Plushette, and the Ultima. Forecast sales for next year are 15,140 for the Sleepeze, 12,420 for the Plushette, and 4,950 for the Ultima. Gene Dixon, vice president of sales, has provided the following information:

1. Salaries for his office (including himself at $62,300, a marketing research assistant at $43,950, and an administrative assistant at $27,450) are budgeted for $133,700 next year.
2. Depreciation on the offices and equipment is $22,850 per year.
3. Office supplies and other expenses total $22,950 per year.
4. Advertising has been steady at $18,250 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 3 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 $55 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	$190	12,010		$205	15,140		$205	17,720
Plushette	302	9,650		345	12,420		358	14,000
Ultima	950	2,260		1,080	4,950		1,290	4,950

Suppose Gene determines that next year's Sales Division activities include the following:

Researchresearching current and future conditions in the industry

Shippingarranging for shipping of mattresses and handling calls from purchasing agents at retail stores to trace shipments and correct errors

Jobberscoordinating the efforts of the independent jobbers who sell the mattresses

Basic adsplacing print and television ads for the Sleepeze and Plushette lines

Ultima adschoosing and working with the advertising agency on the Ultima account

Office managementoperating 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	30	%	-		20	%
Jobbers	10		10		20
Basic ads	-		20		40
Ultima ads	25		-		10
Office management	35		-		10

Additional information is as follows:

1. Depreciation on the office equipment belongs to the office management activity.
2. Of the $22,950 for office supplies and other expenses, $5,100 can be assigned to telephone costs which can be split evenly between the shipping and jobbers' activities. An additional $2,300 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:
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			$

2. On the basis of the budget prepared in Requirement 1, advise Gene regarding actions that might be taken to reduce expenses.