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III. 2 0 0 3 Budgets - prepared in December 2 0 0 2 . 2 0 0 3 Revenue Budget Estimated 2 0 0
III. Budgets prepared in December
Revenue Budget
Estimated production and sales
Estimated average selling price
Budgeted revenues Revenue Budge
IV Management stock option compensation plan.
The management team of Western Chipsets has been historically well compensated. An
important component of compensation, designed to retain talent and to force managers to
behave as owners, has been a significant stockoption grant to managers. The grant of
options has been tied to certain annual firmwide performance targets. These triggers
were generally set to be achievable the firm had met them every year through
Based on the budgets, the compensation committee of the Western Chipsets' board
of directors set a stock option compensation plan for managers of the firm. The plan
guaranteed substantial grants of inthemoney stock options to all levels of the
management team as long as the firm's net income for exceeds the $
level.
V Preliminary results prepared on December
The top management team of Western Chipsets examined the firm's operations through
the first months of on December The actual results and the estimates for
December are below.
The December estimates were prepared based on the number of firm orders received by
the firm for delivery in the month of December. No further orders were anticipated.
The direct materials and direct labor costs were prepared based on the actual average unit
DM and DL usage through November $ and $ respectively These were
expected to be essentially the same in December.
Finally, overhead and G&A amounts for December were prepared using all of the
payments scheduled to be made for equipment leases, facility leases, taxes, and other
G&A amounts. Western Chipsets could not postpone paying for any of these items. All
overhead and G&A costs are fixed they do not go up or down with the number of units,
at least not in the short run.
Not surprisingly, the management team was extremely disappointed after reviewing the
above figures. After what was generally believed to be a good year given the competitive
environment the management appeared to be destined to miss the $ option
grant trigger for the first time in the firm's history.
Western Chipsets' CEO called an executive meeting to discuss the situation and solicited
proposals from the management team on how to proceed. One thing was immediately
clear: there was absolutely no way the company could increase December sales.
At the meeting, Western Chipsets' controller proposed increasing December production
beyond expected sales and inventorying unsold units. The controller claims that this will
increase the company's GAAP net income.
How many units must be produced and inventoried for Western Chipsets to exactly
meet the $ option trigger?
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