Activity-Based Budget

Olympus, Inc., manufactures three models of mattresses: the Sleepeze, the Plushette, and the Ultima. Forecast sales for next year are 15,350 for the Sleepeze, 12,280 for the Plushette, and 5,400 for the Ultima. Gene Dixon, vice president of sales, has provided the following information:

1. Salaries for his office (including himself at $65,000, a marketing research assistant at $41,400, and an administrative assistant at $27,450) are budgeted for $133,850 next year.
2. Depreciation on the offices and equipment is $22,750 per year.
3. Office supplies and other expenses total $23,500 per year.
4. Advertising has been steady at $22,850 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.
5. Commissions on the Sleepeze and Plushette lines are 6 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	$183	12,330		$205	15,350		$205	17,830
Plushette	294	9,980		352	12,280		361	13,960
Ultima	900	1,860		1,000	5,400		1,180	5,400

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	-		75	%	-
Shipping	35	%	-		20	%
Jobbers	15		15		20
Basic ads	-		10		40
Ultima ads	30		-		10
Office management	20		-		10

Additional information is as follows:

1. Depreciation on the office equipment belongs to the office management activity.
2. Of the $23,500 for office supplies and other expenses, $4,800 can be assigned to telephone costs which can be split evenly between the shipping and jobbers' activities. An additional $2,600 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

• Salaries
• Telephone
• Ship Sleepeze
• Commissions
• Advertising

$

• Internet connections
• Telephone
• Ship Sleepeze
• Commissions
• Advertising

$

Shipping:

• Commissions
• Advertising
• Depreciation
• Office Supplies
• Salaries

$

• Commissions
• Advertising
• Depreciation
• Office Supplies
• Telephone

• Commissions
• Advertising
• Depreciation
• Office Supplies
• Ship Sleepeze

• Commissions
• Advertising
• Depreciation
• Office Supplies
• Ship Plushette

• Commissions
• Advertising
• Depreciation
• Office Supplies
• Ship Ultima

Jobbers:

• Depreciation
• Office Supplies
• Ship Sleepeze
• Salaries
• Ship Ultima

$

• Depreciation
• Office Supplies
• Ship Sleepeze
• Telephone
• Ship Ultima

• Depreciation
• Office Supplies
• Ship Sleepeze
• Commissions
• Ship Ultima

Basic ads:
Depreciation Office Supplies Ship Sleepeze Ship Ultima Salaries	$
Depreciation Office Supplies Ship Sleepeze Ship Ultima Advertising
Ultima ads:
Depreciation Office Supplies Ship Sleepeze Ship Ultima Salaries	$
Depreciation Office Supplies Ship Sleepeze Ship Ultima Advertising
Office management:
Salaries Internet connections Advertising Ship Ultima	$
Depreciation Salaries Internet connections Advertising Ship Ultima
Ship Sleepeze Salaries Internet connections Office Supplies Ship Ultima
Total			$

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

• Gene should focus on the most costly activities: salaries, Ultima advertising and commissions to jobbers.
• Gene should focus on the most costly activities: shipping, basic advertising and commissions to jobbers.
• Gene should focus on the most costly activities: shipping, Ultima advertising and commissions to jobbers.