Mathew Philp, president of North Idaho Mining, Ltd., has made budgets a major focus for managers. Making budget was such an important goal that the only two managers who had missed their budgets in 20X7 (by 2% and 4%, respectively) had been summarily fired. This caused all managers to be wary when setting their 20X8 budgets. The Red Mountain Copper Division of North Idaho Mining had the following results for 20X7: : (Click the icon to view the 20X7 results.) Molly Stark, general manager of Red Mountain Copper, received a memo from Philp that contained the following: We expect your profit for 20X8 to be at least $209,000. Prepare a budget showing how you plan to accomplish this. Stark was concerned because the market for copper had recently softened. Her market research staff forecast that sales would be at or below the 20X7 level, and prices would likely be between $0.92 and $0.94 per pound. Her manufacturing manager reported that most of the fixed costs were committed and there were few efficiencies to be gained in the variable costs. He indicated that perhaps a 2% savings in variable costs might be achievable but certainly no more. Read the requirements. Requirement 1. Prepare a budget for Stark to submit to headquarters. What dilemmas does Stark face in preparing this budget? Begin by preparing an optimistic preliminary budget assuming a level sales volume, a $0.94 per pound price, and a 2% decrease in variable costs. 20X8 Budget Sales Variable costs Fixed costs Pretax profit i Data Table $ Sales, 1.6 million pounds @ $0.95/pound Variable costs 1,520,000 880,000 450,000 Fixed costs, primarily depreciation 190,000 Pretax profit Requirement 2. What problem(s) do you see in the budgeting process at North Idaho Mining? O A. Top management is setting an arbitrary target budget without regard to whether the target can be achieved. O B. Draconian measures (termination of employment) are being used when a budget is not met, even if the shortfall is small or reasonable explanations for the shortfall are given. O C. Lower-level management is not being given the opportunity participate in the setting of budgetary targets. O D. All of the above. Requirement 3. Suppose Stark submitted a budget showing a $209,000 profit. It is now late in 20X8, and she has had a good year. Despite an industry-wide decline in sales, Red Mountain Copper's sales matched last year's 1.6 million pounds, and the average price per pound was $0.945, nearly at last year's level and well above that forecast. Variable costs were cut by 2% through extensive efforts. Still, profit projections were more than $9,000 below budget. Stark was concerned for her job so she approached the controller and requested that depreciation schedules be changed. By extending he lives of some equipment for two years, depreciation in 20X8 would be reduced by $15,000. Estimating the economic lives of equipment is difficult, and it would be hard to prove that the old lives were better than the new proposed lives. What should the controller do? What ethical issues does this proposal raise? Extending the depreciable lives of fixed assets by two years will When the estimates of depreciable lives were first The controller should increase the net income by $15,000, putting actual results well above the target. lower the net income by $15,000, increasing the amount by which the division is underbudget. not affect net income. Requirement 3. Suppose Stark submitted a budget showing a $209,000 profit. It is now late in 20X8, and she has had a good year. Despite an ndustry-wide decline in sales, Red Mountain Copper's sales matched last year's 1.6 million pounds, and the average price per pound was $0.945, nearly at last year's level and well above that forecast. Variable costs were cut by 2% through extensive efforts. Still, profit projections were more than $9,000 below budget. Stark was concerned for her job so she approached the controller and requested that depreciation schedules be changed. By extending the lives of some equipment for two years, depreciation in 20X8 would be reduced by $15,000. Estimating the economic lives of equipment is difficult, and it would be hard to prove that the old lives were better than the new proposed lives. What should the controller do? What ethical issues does this proposal raise? Extending the depreciable lives of fixed assets by two years will When the estimates of depreciable lives were first made, there may have been much uncertainty in the estimates. The controller should Because of that uncertainty, changing the useful lives now to improve the financial results is within the realm of ethical behavior. Regardless, changing the accounting method to make the financial results look better is not ethical. Requirement 3. Suppose Stark submitted a budget showing a $209,000 profit. It is now late in 20x8, and she has had a good year. Despite an industry-wide decline in sales, Red Mountain Copper's sales matched last year's 1.6 million pounds, and the average price per pound was $0.945, nearly at last year's level and well above that forecast. Variable costs were cut by 2% through extensive efforts. Still, profit projections were more than $9,000 below budget. Stark was concerned for her job so she approached the controller and requested that depreciation schedules be changed. By extending the lives of some equipment for two years, depreciation in 20X8 would be reduced by $15,000. Estimating the economic lives of equipment is difficult, and it would be hard to prove that the old lives were better than the new proposed lives. What should the controller do? What ethical issues does this proposal raise? Extending the depreciable lives of fixed assets by two years will When the estimates of depreciable lives were first made, there may have been much uncertainty in the estimates. The controller should change the depreciation schedules to save the manager's job, as the change is not in violation of ethical code. not change the depreciation schedules as it is unethical