In response to the scenario provided, you will clarify budget plans with your manager and negotiate changes to the budget. You will then identify and analyse a risk to the budget and prepare a contingency plan to prevent orminimisethe risk.

Procedure

1.Read through the scenario provided and tasks A and B.

2.Write an email in a Word document to your manager to clarify budget and negotiate changes:

a.identify areas of the budget that are not achievable, inaccurate or unclear

b.prepare to negotiate necessary changes to the budget

c.set up a time with your manager to meet.

d.Provide a contingency plan (template provided)

e.Write a brief email to the other cost center managers outlining the proposed changes to the budget explaining the rationale for the change. (Your intention is for them to sign off on the changes so you need to present the changes in a manner which will elicit their support).

Big Red Bicycle Pty Ltd Scenario

Big Red Bicycle is a bicycle manufacturer based in Bendigo Victoria. The company produces bicycles which it sells to retailers in the domestic Australian market.

The senior management structure of the company appears below.

Person

Position

Michelle Yeo

CEO

Tom Copeland

Managing Director

John Black

CFO

Stuart LaRoux

Operations General Manager

Pat Roberts

Senior Accountant

Sam Gellar

Sales General Manager

Charles Pierce

Production Manager

Holly Burke

HR Manager

According to company strategic plans, the company aims to achieve a net profit before tax of $1,000,000. The chief risks to this goal are:

poor sales due to economic downturn

increases in expenses such as wage expenses.

In addition to Australian operations, the company is considering manufacturing overseas to take advantage of reduced costs. The company is also considering diversifying its product range to reduce exposure to poor sales of one product.

Your Role

You are the manager of Sales Centre A, based in Adelaide. The centre has achieved great success over the last year and consistently outsells other sales centres. In fact, due to the large number of accounts managed by your sales team and larger staff, your centre is expected to sell as much volume as the other two sales centres put together. Naturally, you expect cost allocations to reflect the both the needs and importance to the business of Cost Centre A.

Task A

The Sales General Manager, Sam Gellar has asked you to review the master budget and cost centre budgets prepared by the Senior Accountant. She would like you to meet with her to discuss the whether the budget projections are achievable, accurate, understandable and fair.

She would like you to look at the budget for your cost centre closely, note any changes you think are necessary, develop an argument for the changes and outline the reasons why those changes should occur.

Information you are aware of includes:

Sales in the first quarter (Q1), third quarter (Q3), and the fourth quarter (Q4) are generally 30% less than the second quarter (Q2).

Sales in Q2 depend on completion of 90% of repair and maintenance.

Sales for Q2 have been estimated to be $1,000,000.

Commission negotiated with members of the sales team is now at 2.5%.

Task B

It has come to the attention of the managing director, Tom Copeland, that due to the current economic climate, sales volume may be 20% below target this financial year. Tom is worried that this may severely impact profit projections.

The company can accept as much as a 10% variance in profit projections; however, more than this could severely affect the company's ability to pay obligations and invest. Reliable data to determine whether the risk has eventuated should be available by mid Q2, when sales data for the company's product are in.

As a special project, the managing director has asked you to perform a risk assessment and develop a contingency plan to manage the risk of sales falling 20%. Provide a contingency plan to address the potential drop in sales and how you intend to reduce the risk.You should identify at least 3 -5 different plans which can be implemented in the short term (2-6 months)

As per organisational policy you should use the contingency plan template provided.

Budgets and templates

Master budget with profit projections

Big Red Bicycle Pty Ltd

Master Budget FY 2011/2012

FY Q1 Q2 Q3 Q4

REVENUE

Commissions (2% sales)

60,000 15,000 15,000 15,000 15,000

Direct wages fixed

200,000 50,000 50,000 50,000 50,000

Sales

3,000,000 750,000 750,000 750,000 750,000

Cost of Goods Sold

400,000 100,000 100,000 100,000 100,000

Gross Profit

2,340,000 585,000 585,000 585,000 585,000

EXPENSES

General & Administrative Expenses

Accounting fees

20,000

5,000

5,000

5,000

5,000

Legal fees

5,000

1,250

1,250

1,250

1,250

Bank charges

600

150

150

150

150

Office supplies

5,000

1,250

1,250

1,250

1,250

Postage & printing

400

100

100

100

100

Dues & subscriptions

500

125

125

125

125

Telephone

10,000

2,500

2,500

2,500

2,500

Repairs & maintenance

50,000

12,500

12,500

12,500

12,500

Payroll tax

25,000

6,250

6,250

6,250

6,250

Marketing Expenses

Advertising

200,000

50,000

50,000

50,000

50,000

Employment Expenses

Superannuation

45,000

11,250

11,250

11,250

11,250

Wages & salaries

500,000

125,000

125,000

125,000

125,000

Staff amenities

20,000

5,000

5,000

5,000

5,000

Occupancy Costs

Electricity

40,000

10,000

10,000

10,000

10,000

Insurance

100,000

25,000

25,000

25,000

25,000

Rates

100,000

25,000

25,000

25,000

25,000

Rent

200,000

50,000

50,000

50,000

50,000

Water

30,000

7,500

7,500

7,500

7,500

Waste removal

50,000

12,500

12,500

12,500

12,500

TOTAL EXPENSES

1,401,500

350,375

350,375

350,375

350,375

NET PROFIT (BEFORE INTEREST & TAX)

938,500

234,625

234,625

234,625

234,625

Income Tax Expense (25%Net)

234,625

58,656

58,656

58,656

58,656

NET PROFIT AFTER TAX

703,875

175,969

175,969

175,969

175,969

Sales cost centre expense budget

Sales Centre A Sales Centre B Sales Centre C

Commissions $20,000 $20,000 $20,000

Wages $100,000 $100,000 $100,000

Telephone

$3,000

$3,000

$3,000

Office supplies

$1,000

$1,000

$1,000