Philp, president of NorthIdaho 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 RedMountain Copper Division of

NorthIdaho Mining had the following results for 20X7:

Data table

Sales, 1.6 million pounds @ $0.95/pound	$1,520,000
Variable costs	880,000
Fixed costs, primarily depreciation	450,000
Pretax profit	$190,000

Molly Stark, general manager of RedMountain Copper, received a memo from Philp that contained the following:

We expect your profit for 20X8 to be at least $209,000. Show a budget for how 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.

Requirements

1.	Show a budget for how to accomplish this for Stark to submit to headquarters. What dilemmas does Stark face in preparing this budget?
2.	What problems do you see in the budgeting process at NorthIdaho Mining?
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, RedMountain 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?

Part 1

Requirement 1. Show a budget for how to accomplish this for Stark to submit to headquarters. What dilemmas does Stark face in preparing thisbudget?

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

Part 2

2. What problems do you see in the budgeting process at NorthIdaho Mining?

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, RedMountain 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?