Sales Budget: A case of Epoxy Chemicals Epoxy Chemicals Ltd, a mid-sized firm based in Peeniya, Bangalore was engaged in the production and selling of industrial glue. The company manufactured three varieties of glue i.e., Resin, Acrylic and Epoxy adhesives in their plant in Peeniya and marketed and distributed the same across the country. For convenience, they divided their market into three regions - zone 1, zone 2 and zone 3. Zone 1 catered to north and eastern region of India, zone 2 related to western zone and zone 3 represented the southern regions of India. The company followed the budgetary control systems for their cost planning. For the year 2019-2020 too, it was in the process of preparing the budget and, as desired by the CEO Ramanujam, the cost accountant Shruthi Madayaran had submitted the previous year's sales data given as below: Sales in Units (2018-2019) Glue Type Zone 1 Zone 2 Zone 3 Total Resin Adhesive 2000 3000 3000 8000 Acrylic Adhesive 1500 4000 2000 7500 Epoxy Adhesive 1000 6000 2500 9500 Total 4500 13000 7500 25000 As a strategic plan and also as a matter of policy, the prices of these adhesives were kept fixed by the company. Resin was priced at Rs 200, Acrylic at Rs 300 and Epoxy at Rs 800 per pack of 1 kg. Ramanujam had asked his Sales managers for different zone to submit the expected demand for these adhesives for their respective regions. He was particularly worried about zone 1 covering north and eastern part of India where the sales over the years has been disappointing. The company had increased the advertisement budget for that region the previous year and therefore were expecting some improvement in the demand. There was prediction of a general increase in costs this time too where wages and salaries were expected to be up by 10%. The zonal sales manager in consultation with their sales team submitted the projections for their region. The Zonal sales managers 1 forecasted that the demand for Resin adhesive was expected to increase by 30% whereas the demand for the other two adhesives were showing a decline of 5%. However, the forecast by zonal sales manager 2 was little more optimistic. They predicted increase in demand for resin by 40%, for acrylic increase by 30% but decrease in demand for epoxy by 10%. Zonal sales manager 3 estimated 20% and 30% increase in demand of resin and acrylic respectively and a decrease of 10% in epoxy demand. The decrease of demand for Epoxy was common across the zones and therefore Ramanujam asked his sales managers to propose ways to increase the sales of the same. The managers put forward the proposal of an intensive sales campaign which could increase the sale of Epoxy by 20%, 30% and 30% for zone 1, 2 and 3 respectively. However, the campaign was supposed to increase the costs in the following manner: a. Hiring of two additional salesmen for zone 2 and 3 at a salary of Rs 5000 per month each b. Increase in the cost of travelling i.e., vehicle expenses by 5% C. Advertisement on television & print media to be increased by 20% d. Display and promotion cost to go up by R$ 40000 e. Additional marketing person to be hired to monitor the epoxy sales performance at a salary of Rs 5000 per month f. Increasing the sales commission of epoxy to 10% over and above the existing 5% commission for all (on turnover). Ramannujam asked his accountant to submit the data related to last year's Sales and distribution expenses which he promptly submitted. The sales and distribution expenses of last year amounted to R$ 34,24,600 as given below: Salaries of Sales managers-Rs 214000 Salaries of the other sales and marketing staff - Rs 532500 Commission on sales - R$ 572500 Store/warehouse staff salaries - RS 189000 Drivers' salaries - Rs 182500 Vehicle expenses - Rs 252000 Advertisement on TV & Print media - R$ 590000 Sales promotion expenses - R$ 486400 Shop window display cost - R$ 100000 Rent - R$ 92000 Lighting Rs 33700 Miscellaneous expenses - R$ 15500 Internet charges - Rs 2500 Depreciation - R$ 94000 Entertainment R$ 68000 Ramanujam was yet to take a decision about approval or non-approval of the proposal submitted by the Sales managers. He wanted to know about the impact of this proposal on costs and profit. So he referred the details to Shruthi (Cost accountant) and waited for her recommendations. Questions to discuss: 1. Calculate previous year's (2018-19) sales and distribution expenses as percentage of sales and compare with the budgeted sales & distribution expenses as percentage of budgeted sales of 2019-20. 2. Should Ramanujam accept the proposal given by sales managers? Would it be worth - both in the short run as well as in the long run? Discuss