Activity-Based Budget

Olympus, Inc., manufactures three models of mattresses: the Sleepeze, the Plushette, and the Ultima. Forecast sales for next year are 14,980 for the Sleepeze, 12,150 for the Plushette, and 5,180 for the Ultima. Gene Dixon, vice president of sales, has provided the following information:

Salaries for his office (including himself at $65,750, a marketing research assistant at $42,400, and an administrative assistant at $24,150) are budgeted for $132,300 next year.

Depreciation on the offices and equipment is $22,950 per year.

Office supplies and other expenses total $18,500 per year.

Advertising has been steady at $19,450 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 3 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 $45 per unit sold. Gene expects the Ultima line to ship for $80 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	$186	12,530		$211	14,980		$211	18,300
Plushette	294	10,230		344	12,150		356	14,170
Ultima	870	2,220		960	5,180		1,150	5,180

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	25	%	-		25	%
Jobbers	20		10		15
Basic ads	-		20		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 $18,500 for office supplies and other expenses, $5,400 can be assigned to telephone costs which can be split evenly between the shipping and jobbers' activities. An additional $2,700 per year is attributable to Internet connections and fees, and the bulk of these costs (70 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:

Question Content Area

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:
SalariesTelephoneShip SleepezeCommissionsAdvertisingSalaries	$Salaries
Internet connectionsTelephoneShip SleepezeCommissionsAdvertisingInternet connections	Internet connections	$Internet connections
Shipping:
CommissionsAdvertisingDepreciationOffice SuppliesSalariesSalaries	$Salaries
CommissionsAdvertisingDepreciationOffice SuppliesTelephoneTelephone	Telephone
CommissionsAdvertisingDepreciationOffice SuppliesShip SleepezeShip Sleepeze	Ship Sleepeze
CommissionsAdvertisingDepreciationOffice SuppliesShip PlushetteShip Plushette	Ship Plushette
CommissionsAdvertisingDepreciationOffice SuppliesShip UltimaShip Ultima	Ship Ultima	Ship Ultima
Jobbers:
DepreciationOffice SuppliesShip SleepezeSalariesShip UltimaSalaries	$Salaries
DepreciationOffice SuppliesShip SleepezeTelephoneShip UltimaTelephone	Telephone
DepreciationOffice SuppliesShip SleepezeCommissionsShip UltimaCommissions	Commissions	Commissions
Basic ads:
DepreciationOffice SuppliesShip SleepezeShip UltimaSalariesSalaries	$Salaries
DepreciationOffice SuppliesShip SleepezeShip UltimaAdvertisingAdvertising	Advertising	Advertising
Ultima ads:
DepreciationOffice SuppliesShip SleepezeShip UltimaSalariesSalaries	$Salaries
DepreciationOffice SuppliesShip SleepezeShip UltimaAdvertisingAdvertising	Advertising	Advertising
Office management:
SalariesInternet connectionsAdvertisingShip UltimaSalaries	$Salaries
DepreciationSalariesInternet connectionsAdvertisingShip UltimaDepreciation	Depreciation
Ship SleepezeSalariesInternet connectionsOffice SuppliesShip UltimaOffice Supplies	Office Supplies	Office Supplies
Total			$fill in the blank a786dcfc7061fe7_41

Question Content Area

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.