You have been asked to provide budgetary information to the boardof Directors for a meeting where they will decide the pricing of animportant product for the next period.

The following information is available from the records:

You find that between the previous and current periods there was a4% general inflation rate and it is forecast that costs will furtherincrease by 6% in the next period.

The firm did not increase the selling price in the current periodalthough competitors raised their prices by 4% to allow for theincreased costs.

A survey by economic consultants was commissioned and has foundthat the demand for the product is elastic with an estimated priceelasticity of demand of 1.5. This means that volume will fall by one anda half times the rate of real price increase.

Required:

(a)Show the budgeted position if the firmmaintains a $13 selling price for the next period (when it is expectedthat competitors will increase their prices by 6%)

(10 marks)

(b)Show the budgeted position if the firm increases its prices by 6%

(6 marks)

(c)Write short report to the Board, withappropriate figures, recommending whether the firm should maintain the$13 selling price or raise it by 6%

(4 marks)

NN Ltd manufactures and markets a range of electronic officeequipment. The company currently has a turnover of $40 million perannum. The company has a functional structure and currently operates anincremental budgeting system. The company has a budget committee that iscomprised entirely of members of the senior management team.

No other personnel are involved in the budget-setting process.

Each member of the senior management team has enjoyed an annualbonus of between 10% and 20% of their annual salary for each of the pastfive years. The annual bonuses are calculated by comparing the actualcosts attributed to a particular function with budgeted costs for thatfunction during the twelve month period ended 31 December in each year.

A new Finance Director, who previously held a senior managementposition in a 'not for profit' health organisation, has recently beenappointed. Whilst employed by the health service organisation, the newFinance Director had been the manager responsible for the implementationof a zero-based budgeting system which proved highly successful.

Required:

(a)As the new Finance Director, prepare memorandum to the senior management team of NN Ltd which identifies and discusses:

(i)factors to be considered when implementing a system of zero-based budgeting within NN Ltd;

(10 marks)

(ii)the behavioural problems that themanagement of NN Ltd might encounter in implementing a system ofzero-based budgeting, recommending.

(6 marks)

(b)Explain how the implementation of azero-based budgeting system in NN Ltd may differ from the implementationof such a system in a 'not for profit' health organisation.

(4 marks)r