137. Grey Company is considering replacing its existing cutting machine with a new machine
that, according to the manufacturer, is more efficient in terms of energy consumption—a variable
cost of production. In this regard, the company would like to do some financial planning, including
“what-if” analysis. Budgeted information regarding the two machines is as follows:
Item Existing Machine New Machine
Variable cost per unit $44 $40
Fixed costs per month $32,000 $40,000
Selling price per unit $55 $55
Required:
1. Determine the sales volume at which the costs are the same for both machines.
2. What amount of sales, in dollars, for the new machine would produce a 10% profit margin (that
is, a ratio of operating profit to sales of 10%)?
138. As indicated in the text,
sensitivity
analysis
is an important tool for dealing with
uncertainty in the budget preparation process. Which estimates, out of all that management has
to deal with, do you think are the most critical in terms of developing the master budget for the
typical profit-seeking organization?
139. One of the behavioral considerations in implementing a budgeting system has to do with
the issue of
budgetary
slack
. What are the positive and negative aspects of building slack into
budgets from top management’s point of view, and the employee’s point of view (i.e., the
individual responsible for building slack into the budget)?
140. Omni, Inc. manages a medical-expense reimbursement program for colleges and
universities throughout the United States. University employees submit claims for reimbursement
of medical expenses from reimbursement accounts established each year by the employees.
Omni then processes reimbursement requests, verifies the legitimacy of each request, computes
the deductible and co-payment required, determines whether the employee’s expense
reimbursement account has adequate funds available, and, if applicable, issues a reimbursement
check to the eligible employee.
Omni employs three different types of clerks who manage these reimbursement accounts:
managers, clerical staff-1, and clerical staff-2. The managers are each paid $50,000 per year,
clerical staff-1 employees are paid $40,000 per year, while clerical staff-2 employees are paid
$35,000 per year. Based on prior experience, for every 150,000 claims processed per year, Omni
needs to budget for one manager’s position, two clerical staff-1 positions, and six clerical staff-2
positions.
Last year, Omni processed 2 million reimbursement claims, and employed 14 managers, 30
clerical staff-1 employees, and 83 clerical staff-2 employees.
Required:
1. Based on the data provided, calculate the cost savings or excess staffing costs for Omni during
the most recent year. (Assume that the policy of the company is to hire only full-time employees.)
2. What managerial insights are suggested on the basis of your analysis? If you were attempting
to judge the processing efficiency of Omni’s staff, what additional information might you want to
have?
141. The Bambola Doll Company produces a single product: an inexpensive plastic toy doll.
This item sells for $4.00 per unit, and has variable costs (manufacturing plus marketing) of $2.50
per unit. Monthly fixed costs amount to approximately $60,000. Last month, sales reached
100,000 units. Management would like to do some financial planning, the end result of which
would—it is hoped— be even better future financial performance. As a management accountant
you have been asked to construct a planning model and to conduct “what-if” analyses with the
model you develop.
Management has told you to consider the following options, all of which have the potential to
increase the profitability of the company:
A) Increase monthly promotional and advertising costs.
B) Increase raw material quality and increase the product selling price.
C) Increase the product selling price, with no increase in the raw material costs.
Required:
1. The sales manager of the company is fairly confident that a well-done marketing campaign
could increase sales volume substantially, perhaps as much as doubling sales from the current
position. The president of the company would like to increase operating profits by 50% over those
of the most recent month. You are asked to determine how much the company could afford to
spend on an intensive marketing campaign, in order to achieve the projected doubling of sales
volume?
2. As an alternative to 1 above, assume that the company increases the quality of its raw
materials going into the manufacturing of its product. This increase would result in a new
variable cost per unit of $3.00. What is the required increase in selling price per unit that would
be needed to maintain the same break-even volume as currently exists?
3. As a final alternative, assume that the company has decided to increase the selling price of its
product by $1 per unit, with no accompanying marketing and promotion campaign. What is the
unit sales volume needed, with the new selling price, for the company to make the same amount
of profit as it did last month?
142. Over the years, alternative approaches to traditional budgeting practices have been
proposed to facilitate budget preparation and usefulness.
Required:
1) Define what is meant by the term “traditional budgeting.”
2) Compare and contrast the following alternative budgeting approaches to a traditional
budgeting process:
a. Zero Base Budgeting (ZBB)
b. Activity-Based Budgeting (ABB)
c. Time-Driven ABB
d. Kaizen budgeting
143. Compare and contrast traditional budgeting and activity-based budgeting (ABB) along the
following dimensions: budgeting unit; primary focus; time orientation; roles of suppliers and
customers; and, control objective.
144. As indicated in the text, one of the behavioral issues associated with budgeting deals
with the linkage of employee compensation to budgeted performance. In this regard, distinguish
between so-called
fixed-performance
contracts
(i.e., a traditional approach) and the following
two recommended alternatives: (1)
linear
compensation
plans
, and (2) the use of
relative
performance
(relative
improvement)
contracts
along
with
“rolling
financial
forecasts
.” With
respect to the use of fixed performance contracts, define what is meant by the term “gaming the
performance indicator.” With respect to the use of relative performance contracts, define what is
meant by the term “rolling financial forecasts.”
145. One of the behavioral considerations associated with the budgeting process relates to the
difficulty level embodied in the budget (i.e., how difficult or easy it is to achieve budgeted
results).
Required:
1. Explain the negative consequences of budgetary targets that are too easy or too difficult to
achieve.
2. What is meant by the term “highly achievable (budget) target”?
3. What are the primary advantages of using “highly achievable targets” in terms of budgetary
expectations?
146. Transcript Company is preparing a cash budget for February.
• The company has $150,000 cash at the beginning of February and anticipates total sales of
$800,000, consisting of 25% cash sales and 75% bank credit-card sales.
• The bank charges 3 percent for credit-card deposits.
• The firm sets its selling price at 160 percent of the cost of purchases and pays the cost of each
month’s sales at the end of the month.
• Operating expenses are $45,000 per month, of which $25,000 is depreciation expense. Selling
expenses (commissions) each month amount to 4 percent of total sales dollars.
• In addition, a $600,000 note will be due in February for equipment purchased last August. In
addition to the principal amount, interest for one month (at 12% per year) will be paid in
February.
• Transcript Company has an agreement with its bank to maintain a minimum cash balance of
$100,000.
Required:
Prepare
in
good
form
a cash budget that shows the amount, if any, that the company must
borrow during February. Separate your budget, at a minimum, into the following categories:
Beginning Cash Balance
Operating Cash Flows (Both Inflows and Outflows)
Cash Balance before Financing Effects
Financing Activity
Ending Cash Balance
