Task 2 Budget Planning

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Katie Ebert
JET2 Task 2
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There are a few areas of concern when looking over Competition Bike’s budget for the upcoming year (Year 9). This budget estimates that 3,510 units will be sold. CB has just experienced a 15 % decline in sales, due to the economic situation. In year 8, CB sold 3,400 units. This flexible budget is allowing 110 more units be added into the mix. Although sales trends have remained consistent, despite the decline in sales from professional riders, it might be wise to not aim as high to make sure the recovery actually does occur. The sales forecast predicts that CB will recover over the next 3 years. CB estimates over $100,000 more in cash and cash equivalents for year 9. This is, of course due to the increase in unit sales that is worked into the budget. It might be a better idea to underestimate rather than overestimate when it comes to cash on hand. Retaining a quality labor force has never been a problem for CB. I feel it raises some concern when the budget does not allow for any wiggle room with the labor hours. This would be an area in the budget that would make sense to allot some extra time/money. CB would be wise to be sure each unit is manufactured properly, with absolutely no mistakes after coming off a sales year which yielded less than ideal results. If riders do actually decide to continue buying CarbonLite bikes, CB must be extremely confident in the units they are selling. Even allowing for an extra hour per unit would help to cushion this part of the flexible budget. In the selling, general and administrative budget for year 9 there are a few areas of concern. The advertising budget is 2% of the projected Gross Margin. CB should increase their advertising budget. Coming up with a new phrase or slogan will help CB stand out in the consumer’s mind. Especially after the economic decline in year 8, CB will want to make sure that their customers know they are still here and better than ever. The budget lists Utilities at $150,000. This is the same as year 8. Still a concern from year 8 is the line item- Other General and Admin Expenses. This area has $170,000 budgeted for it. This is an area where CB can cut some spending to lead to more profitable end of year results. If it cannot be cut, then the details should be spelled out in the budget. As it stands now, one cannot ascertain what that money is being used for, which raises some red flags. Also listed is the line item-Utilities and Services. Why would there be an additional line added for this in the flexible budget. This is not something listed for the previous year. With $150,000 for Utilities and $170,000 for Other, what additional utilities and services are they budgeting $54,000 for and why? Year 8 did not result in an increase in sales for CB. In fact, year 8 resulted in a 27% decrease in overall gross profit, due to selling fewer units than anticipated at the start of the year. After reviewing the flexible budget for year 9, it is apparent there are areas of concern which should be addressed and corrected, if possible. Along with the areas noted above, under Current Liabilities there are two different line items: “Accrued Salaries and Related Expense and Other Accrued Expenses.” With a total of nearly $40,000, an explanation is needed as to what this money is being budgeted for. CB is also estimating that they will have over $30,000 less money owed for Accounts and Noted payable in year 9. I’m not confident that if year 8 ended at a certain point, with a dollar amount being owed, how year 9 wouldn’t be budgeted for that same amount from the beginning. Although a minor detail, it appears that some sections of the budget are off by $1 when double checked. Even though it is only $1, it perhaps shows reveals something about those creating the budget or those who are in charge of the numbers. The flexible budget for year 9 has CB selling 3,510 units. This is an increase from year 8...
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