Activity-Based Budget

Olympus, Inc., manufactures three models of mattresses: theSleepeze, the Plushette, and the Ultima. Forecast sales for nextyear are 15,600 for the Sleepeze, 12,700 for the Plushette, and5,100 for the Ultima. Gene Dixon, vice president of sales, hasprovided the following information:

1. Salaries for his office (including himself at $64,250, amarketing research assistant at $36,350, and an administrativeassistant at $25,650) are budgeted for $126,250 next year.
2. Depreciation on the offices and equipment is $18,550 peryear.
3. Office supplies and other expenses total $23,350 per year.
4. Advertising has been steady at $19,400 per year. However, theUltima is a new product and will require extensive advertising toeducate consumers on the unique features of this high-end mattress.Gene believes the company should spend 10 percent of first-yearUltima sales for a print and television campaign.
5. Commissions on the Sleepeze and Plushette lines are 3 percentof sales. These commissions are paid to independent jobbers whosell the mattresses to retail stores.
6. Last year, shipping for the Sleepeze and Plushette linesaveraged $45 per unit sold. Gene expects the Ultima line to shipfor $80 per unit sold since this model features a largermattress.

Suppose that Gene is considering three sales scenarios asfollows:

	Pessimistic			Expected			Optimistic
	Price	Quantity		Price	Quantity		Price	Quantity
Sleepeze	$173	12,700		$188	15,600		$188	17,960
Plushette	302	10,130		349	12,700		363	14,440
Ultima	890	2,170		980	5,100		1,200	5,100

Suppose Gene determines that next year's Sales Divisionactivities include the following:

Research—researching current and future conditions in theindustry

Shipping—arranging for shipping of mattresses and handling callsfrom purchasing agents at retail stores to trace shipments andcorrect errors

Jobbers—coordinating the efforts of the independent jobbers whosell the mattresses

Basic ads—placing print and television ads for the Sleepeze andPlushette lines

Ultima ads—choosing and working with the advertising agency onthe Ultima account

Office management—operating the Sales Division office

The percentage of time spent by each employee of the SalesDivision on each of the above activities is given in the followingtable:

	Gene		Research Assistant		Administrative Assistant
Research	-		75	%	-
Shipping	30	%	-		15	%
Jobbers	10		10		25
Basic ads	-		15		40
Ultima ads	35		-		5
Office management	25		-		15

Additional information is as follows:

1. Depreciation on the office equipment belongs to the officemanagement activity.
2. Of the $23,350 for office supplies and other expenses, $4,600can be assigned to telephone costs which can be split evenlybetween the shipping and jobbers' activities. An additional $2,300per year is attributable to Internet connections and fees, and thebulk of these costs (75 percent) are assignable to research. Theremainder is a cost of office management. All other office suppliesand costs are assigned to the office management activity.

Required:

1. Prepare an activity-based budget for nextyear by activity. Use the expected level of sales activity. Ifrequired, round answers to the nearest dollar.

Olympus, Inc.
Activity-Based Budget
For Next Year
Research:
Salaries	$
Internet connections		$
Shipping:
Salaries	$
Telephone
Ship Sleepeze
Ship Plushette
Ship Ultima
Jobbers:
Salaries	$
Telephone
Commissions
Basic ads:
Salaries	$
Advertising
Ultima ads:
Salaries	$
Advertising
Office management:
Salaries	$
Depreciation
Office Supplies
Total			$

2. On the basis of the budget prepared inRequirement 1, advise Gene regarding actions that might be taken toreduce expenses.