Question

You have been recruited by a former classmate, Susanna Wu, to join the finance team of a company that she founded recently. The company produces a unique product line of hypoallergenic cosmetics and relies for its success on an aggressive marketing program. The company is in a start-up phase and therefore has no significant history of expenses and revenues upon which to rely for budgeting and planning purposes. Given the restriction on available funds (most of the available capital has been used for new product development and to recruit a management team), the control of costs, including marketing costs, is thought by the management team to be essential for the short-term viability of the company. You have held a number of intensive discussions with Susanna and John Thompson, director of marketing for the firm. They have asked you to prepare an estimated budget for marketing expenses for a month of operations You are provided with the following data, which represent average actual monthly costs over the past three months Cost Sales commissions Sales staff salaries Telephone and mailing Rental-office building Gas (utilities) Delivery charges Depreciation-office furniture Marketing consultants Amount $120,000 40,000 38,000 25,000 12,000 70,000 8,000 25,000 Your discussions with John and Susanna indicate the following assumptions and anticipated changes regarding monthly marketing expenses for the coming year: Sales volume, because of aggressive marketing, should increase by 10%. To meet competitive pressures, sales prices are expected to decrease by 5%. . Sales commissions are based on a percentage of sales revenue . Sales staff salaries, because of a new hire, will increase by 10%, regardless of sales volume . Because of recent industrywide factors, rates for telephone and mailing costs, as well as delivery charges, are expected to increase by 6%. However, both of these categories of costs are variable with sales volume .Rent on the office building is based on a 2-year lease, with 18 months remaining on the original lease . Gas utility costs are largely independent of changes in sales volume. However, because of industrywide disruptions in supply, these costs are expected to increase by 15%, regardless of changes in sales volume .Depreciation on the office furniture used by members of the sales staff should increase because of new equipment that will be acquired. The planned cost for this equipment is $30,000, which will be depreciated using the straight-line (SL) method, with no salvage value, over a 5-year useful life Because of competitive pressure, the company plans to increase the cost of marketing consultants by $5,000 per month. Required 1. Based on the preceding information, what is the percentage change, by line item and in total, for items in your budget? 2. The management team is worried about the short-term financial position of the new company. Given the strain on available cash,

Answer 1

Budgeted cost Part 1 Monthly marketing expense budget Past month calculation Answer | % change c-(b-a)/a Sales commiss ions Sales staff salaries Telephone and mailing Rental-sales office buildin Gas (utilities) Delivery charges Depreciation-office furniture Existing furniture New furniture Marketing consultants 120,000 120000*1.1*(1-.05)125,400 44,000 44,308 25,000 13,800 81,620 4.50% 10.00% 16.60% 0.00% 15.00% 16.60% 40,00040000*1.1 38,000 38000*1.1*1.06 25,000 12,000 12000*1.15 70,00070000*1.1*1.06 8,000 8,000 500 30,000 372,628 0.00% 0.00% 20.00% 10.24% 30000/60 25,00025000+5000 Total cost 338,000 Part 2 Monthly marketing expense budget Budgeted cost | % change Sales commiss ions Sales staff salaries Telephone and mailing Rental-sales office buildin Gas (utilities) Delivery charges Depreciation-office furniture 125,400 44,000 21,680 25,000 13,800 81,620 4.50% 10.00% -42.95% 0.00% 15.00% 16.60% Existing funiture New furniture 8,000 500 30,000 350,000 0.00% 0.00% 20.00% 3.55% Marketing consultants Total cost

*working reduction in Telephone and mailing cost-372628-350000 22,628 Telephone and mailing cost after reduction 44308-22628 21,680 |-42.95% | % change: (21680-38000)/38000