Currently, Whiz Calculator is estimating the budget for the coming year’s selling expenses as if it is comprised of only fixed expenses. President Riesman finds this method unsatisfactory for two major reasons: 1. It is difficult to judge how good the estimates made by the department heads really are; and 2. Selling conditions fluctuate over time and there is no way to account for these changes in the selling expenses once the budget is set for that year. Thus a new budgeting method is being researched at this time.
The new method, if adopted, would be based on both fixed and variable costs. The fixed costs will be those incurred at the minimum sales volume and the variable costs would be expressed as an amount per sales dollar. President Riesman and the controller understand that basing the selling costs on sales has some limitations, but believe that this method would still be more appropriate than the current model because it would incorporate some variability and allow for budget adjustments. After some initial research, it was determined that the minimum sales volume required to operate is 65% of the total capacity. The expenses for this capacity were determined using regression analysis, which established that at this percentage of capacity they company should have $250,000 in sales with $2,218 in expenses. The fixed portion of these expenses is $318 and the variable portion is 0.0076 per sales dollar. From this equation/graph, each selling expense was calculated to form the new budget (see exhibit 3 in the case).
It is important to note that this new method does not consider the nature of each selling region, economies of scale for large orders, or consumer behavior. Additionally, not all highlighted selling expenses are variable to sales and some are only partly variable to sale (e.g. officer’s salary and travel expenses). When comparing the new method figures with the figures from the current method, it is apparent that the new method...
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