经济金融essay/report/assignment/paper代写-Buns Bakery: Creating and Using a Master Budget

经济金融essay/report/assignment/paper代写

  • Buns Bakery: Creating and Using a Master Budget

ISSN 1940-204X- Jason C. Porter

  • University of Idaho

  • BACkgROUND

Teresa Stephenson

University of Wyoming

  • Buns Bakery is a medium-sized regional bakery that

  • specializes in providing orders to grocery and convenience

  • stores. Because of the popularity of its brand, it has also

  • opened a small café for walk-in business.

  • In order to maintain its high quality standard, Buns

  • produces only three products: breakfast muffins, fresh bread,

  • and chocolate chip cookies. Although business has been

  • good in the past few years, a lucky contact with a large chain

  • has recently allowed it to expand its brand out of the local

  • region. Growth has been high since the new contract went

  • into effect.

  • Andy Griff, the chief executive officer (CEO) and

  • founder, has arranged a meeting with a venture capital

  • firm next week. Hopefully the meeting will result in the

  • sale of some of Buns’ stock and an opportunity to establish

  • a significant line of credit with the venture capital firm.

  • These extra funds, if Andy can secure them, should provide

  • sufficient money to meet Buns’ growth targets for the next

  • few years. The venture capital firm’s assessment team has

  • asked Andy to provide a quarterly master budget for the

  • coming year, complete with pro forma financial statements,

  • at the meeting. They have expressed special interest in

  • Buns’ earnings per share (EPS), cash flow from operations,

  • and profit margins, indicating that good numbers in these

  • areas will be essential for final approval.

  • In typical managerial style, Andy immediately assigned

  • the task of creating the budget to Nicole Quarterman, who

  • has just been hired as Buns’ controller. Since this project is

  • her first assignment, Nicole started by making appointments

  • with each of the divisional managers to gather information

  • for the budget and also to learn more about the company.

PART I: CREATINg ThE BUDgET

MEETINgS wITh DIvISIONAL MANAgERSMEETINg wITh ThE SALES DEPARTMENT

Walking down the hallway towards the office of Jeff Barza,the sales manager, Nicole read the results for last quarter.Buns Bakery sold 45,000 one-dozen packages of muffins for$5.50 each, 65,000 one-dozen packages of cookies for $4.75each, and 85,000 loaves of bread for $5.25 each. When Nicolegot to Jeff’s office, he motioned her in to have a seat.“Is it time for our meeting already?” he asked. “Wheredoes the day go?”

“Who knows? It seems like one minute I’m havingmy morning muffin and the next I’m saying good-bye toeveryone,” Nicole said with a sigh. “There’s never time toget everything done. And now I get to do the budget.” Jeffstarted to laugh. “Thanks,” she muttered. “I knew I couldcount on your support.”

“I’m sorry. I just have to laugh at the amount of time youare going to put into something that isn’t really used anyway,except for setting bonuses, of course.”

“Not really used? I don’t know how it’s been around herein the past, but this year, at least, the budget will prove to bea valuable tool.” Nicole waved away Jeff’s retort. “Anyway,one way or another I have to create one and, as you know,the process always starts with projected sales. Do you have acopy of last quarter’s results?”

“Yes, right here somewhere,” Jeff said, shuffling papersaround on his desk. “Got it!” he exclaimed, waving it gentlyas he pulled it from under a stack of other papers. “Now,what do you want to know exactly?”

“Well, Andy thinks that since we have established astrong following both locally and in our new markets, weIMA EDUCATIONAL CASE JOURNAL VOL. 2, NO. 2, ART. 3 JUNE 2009

  • can raise our prices slightly next year without a sharp drop in

  • sales. He was thinking $6.00 for muffins, $5.25 for cookies,

  • and $5.75 for bread. What do you think?”

  • “I agree,” Jeff said eagerly. “I’ve been pushing that for

  • years. Of course, I think that sales will drop some in the first

  • quarter of next year. They always drop off a bit after the

  • holidays anyway, but with the increase in sales price . . . I’d

  • say a 20 percent drop from the fourth quarter results we have

  • here.” He looked up questioningly and raised an eyebrow.

  • Nicole frowned. “That sounds kind of high. Based on

  • what I saw in the dairy industry, I was thinking the drop

  • would only be about 10 percent.”

  • Jeff looked a little uncomfortable and shuffled around in

  • his chair. “Well, it’s a little different for a bakery. Our price is

  • a little more elastic than dairy products. Besides, 20 percent

  • is a more conservative estimate and in the past we wanted no

  • surprises.” He looked at her and challenged, “Are you going

  • to change that?”

  • “Yeah, but we’ll be using this master budget to create

  • a cash flow budget and pro forma financial statements to

  • show our new investor. We need to look good, not bad.”

  • Nicole frowned. She didn’t want to start making changes and

  • enemies in her first few months.

  • “I guess so. But, look—my bonus is tied to how well I

  • meet my estimates. If we estimate low results and then go

  • up . . .” Seeing the look on her face, he quickly changed

  • direction. “Besides, Nicole, we are raising the prices. A 10

  • percent drop is normal after Christmas, but couple that with

  • the increased prices, and 20 percent is reasonable.”

  • Nicole frowned, and then sighed. She didn’t quite accept

  • his reasoning, but it would be better to have him on her

  • side until she understood the company politics a bit better.

  • “Okay, Jeff. I’ll take your word for it. We’ll use 20 percent.

  • After all, you’re the expert.”

  • “You’ve got that right!” Jeff said, trying to hide his relief.

  • He was obviously really counting on that bonus. He looked

  • at a couple of sales reports and market projections on the

  • desk in front of him. “After that, I think sales will grow

  • steadily at about 5 percent a quarter with these new prices.

  • Fourth-quarter sales will be high because of the holidays—

  • let’s say 20 percent, instead of 5 percent, from the third to

  • the fourth quarter. The first quarter of the following year will

  • continue the 5 percent growth as though the holiday jump

  • didn’t occur. And I’m not messing with those estimates.

  • That’s really my best guess, given what I’ve seen in the

  • past.” He looked up. “Does that give you all you need?”

  • “Just a few more questions. Have you made any changes

  • to the credit policy? The information I have from last year

  • says that we make about 10 percent of our sales through our

café and that we don’t sell to those customers on credit.”Jeff smiled. “Yep. But we do sell on credit to the businesscustomers. If we didn’t, they’d definitely go somewhere else.So, we give our business customers a lot of leeway in payingus. It makes it a little hard on us, but it keeps them loyal.Anyway, we collect 30 percent of the credit sales within thecurrent quarter, 45 percent in the following quarter, and 25percent in the quarter after that. The good news is that wedon’t have any bad debt. Our customers are mostly largechains with strong sales and even better reputations. Sincethey are large companies, they take their time paying smallcompanies like us, but we get the money from all of them inthe end.”

“Then I have only two more questions. What were totalsales during the third and fourth quarters of last year, and arewe still collecting any of that money?”

Jeff pulled up a file. “Total sales were $802,000 and$1,002,500, respectively, and we are still collecting quite a bitof that money based on our collection breakdown.”“I think that does it, then. If I’ve forgotten something,I’ll come back and bug you later. It’s more fun to interruptyou several times anyway. And you owe me one now.”MEETINg wITh ThE PRODUCTION DEPARTMENTNicole sighed as she headed to her meeting with PhilMainster, Buns’ head chef. She wasn’t sure about that largedrop Jeff wanted her to use, but as the new member of thestaff she wasn’t sure what she should do. Of course, shedidn’t have much time to think about it now anyway. Shehad met Phil before, so she knew that it was going to be aninteresting meeting.

As she had suspected, she found Phil in the bakeryinstead of his office. “Phil,” she called as she hurried towardshim, “did you forget our meeting?”

“Me, forget?” Phil asked in a surprised voice. “I neverforget anything!” Nicole had to chuckle at the large streakof flour across his face. “You said you wanted to see ourproduction facility, and I’m ready to show it to you.”Nicole shook her head. “No, Phil. I didn’t say I wantedto see the production facility; I said I wanted to talk to youabout the budget for next year.”

“Oh, of course you did.” Phil’s round face had turned adeeper shade of pink. “Then why don’t we go to my officeand talk?”

Nicole sighed. “That’s a great idea, Phil.”

As they sat down, Nicole asked her first question. “Okay,Phil, I need to know how much inventory we keep on hand.”“Well, we can’t keep much in the way of finished goodson hand. My cookies and bread would dry out if we keptIMA EDUCATIONAL CASE JOURNAL VOL. 2, NO. 2, ART. 3 JUNE 2009

  • them too long. I’d say that we normally keep only about two

  • days’ worth of inventory on hand to avoid shipping issues or

  • problems with the café.”

  • “Okay, and you make your estimates based on a 90-day

  • quarter?”

  • Phil nodded impatiently. “Please, Nicole, don’t ask

  • obvious questions.”

  • “I’m sorry. Let’s talk about your pantry. You take care of

  • purchasing too, don’t you?”

  • “Yessirree. We decided it would be easier for me to run

  • purchasing than to have a separate manager do it. After all, I

  • do everything else around here.”

  • “Well, we want it done right.”

  • Phil chuckled. “I’ll have to remember that one. Martha

  • will love it. Okay, let’s talk raw materials. Some days we have

  • to produce a lot to meet our orders, so I normally try to keep

  • 15 percent of the next quarter’s raw materials on hand at all

  • times.”

  • “Is that what we’ve got on hand now for the coming

  • year?”

  • “Of course. Jeff and I had already talked about the

  • possibility of raising prices and his estimate of a 20 percent

  • drop in demand, so I’m ready to go.”

  • Nicole considered telling Phil that she was unsure the 20

  • percent drop would really materialize, but changed her mind.

  • There would be time to get the extra ingredients ordered if

  • sales only dropped 10 percent, and she didn’t want anyone

  • to think she had caved in to peer pressure. “Good. Can you

  • give me some estimates of how long it takes to make each

  • package of cookies, bread, and muffins?”

start to finish. We do them in large batches, so I have no ideahow long each final package takes.” Seeing Nicole’s frown, hequickly went on. “But, I can tell you that one of my mixerscan mix together either 12 dozen cookies, 8 dozen muffins, or4 loaves of bread in 15 minutes. The bakers then take anotherhalf an hour to get the dough ready and bake it.”“The batch sizes are the same for each product?”“Yep. I try to keep things as standard as possible. Thepackaging department is the slowest. They have to doublewrap the cookies and muffins—once to keep them fresh andonce in the fancy packages marketing came up with—so ittakes 15 minutes to package either two one-dozen packagesof cookies or two one-dozen packages of muffins. The breadis a little faster. In 15 minutes we can package about eightloaves of bread.”

“Do you happen to know what we are paying each groupof employees?”

Phil grabbed a piece of paper. “We pay the mixers $7.50 anhour, the bakers $8.00 an hour, and the packers $6.50 an hour.”“Perfect. Then I just have one more question.”“Let me guess. You want a breakdown of ingredients foreach item we bake.”

“You must be psychic, Phil.”

“No, I just remember being bugged about this by the lastcontroller.” He handed Nicole a piece of paper with a tableon it. “Here they all are. Just make sure you don’t let it outof the building! I don’t want my secret recipes to get out.”“Don’t worry. I’ll be careful.” Nicole glanced down at theprice sheet. “Wow. I wish I could buy my groceries at theseprices.”

  • “Are you kidding? We don’t really move each item from

Phil chuckled. “So do I. You have to remember, though,Cookies

Muffins

  • Exhibit 1

  • Summary of Ingredients

  • Ingredients

  • Flour

  • Margarine

  • Sugar

  • Eggs (each)

  • Milk (per gallon)

  • Cocoa

  • Peanut Butter Chips

  • Mini Chocolate Chips

  • Shortening

  • Baking Packet*

    • The Baking Packet consists of ingredients too small to be purchased by the pound, so the bakery buys them in prepared packets.

lbs./dozen price/lb.

$0.15

$0.25

$0.20

$0.05

$1.50

$0.75

$0.10

total

$0.08

$0.19

$0.20

$0.10

$0.38

$0.75

$0.10

$1.79

lbs./dozen price/lb.

$0.15

$0.25

$0.20

$0.05

$1.25

$0.75

$0.10

0.5

0.25

0.5

0.10

0.5

0.75

0.25

Breadprice/lb.$0.15$0.20$1.25$0.50$0.10total$0.45$0.05$0.31$0.13$0.10$1.04lbs./dozen

0.25

0.25

0.25

total

$0.08

$0.06

$0.10

$0.10

$0.13

$0.75

$0.10

$1.31

IMA EDUCATIONAL CASE JOURNAL VOL. 2, NO. 2, ART. 3 JUNE 2009

  • that we buy in bulk, lots and lots of bulk. That lets us get

  • some great deals from our local vendors.”

  • “I guess that makes sense. Thanks for taking time to see me.”

  • “Just make sure you don’t leave without taking a cookie

  • or two.” Phil held out a plate loaded with perfect, if two-day

  • old, cookies. “If we don’t eat them, they go into the trash!”

  • “My pleasure!”

  • MEETINg wITh ThE ACCOUNTINg DEPARTMENT

  • Nicole hurried back to her own office. She had a staff

  • meeting in 15 minutes. She should be able to get most of the

  • information she still needed from Sarah, since she wrote the

  • checks. Even though Sarah only worked part-time, she’d been

  • with the bakery from the beginning and seemed to know

  • just about everything about the accounting system. Anything

  • Sarah didn’t know, Bob, their new summer intern, would have

  • found out for her by now. He was very good at digging up

  • information once he was pointed in the right direction.

  • “We thought you were going to stand us up,” Sarah said

  • as Nicole hurried into the office.

  • “Actually, we hoped you were,” Bob quipped. “We don’t

  • want to get stuck doing the budget, so we hoped that you

  • would forget to come.”

  • “Don’t worry,” Nicole said with a sigh. “Andy wants me

  • to take care of it personally. He seems to think it would be

  • good for me to get to know the company or something. So,

  • have you gathered all the information that I asked for?”

  • “Of course,” Sarah said. “Where do you want us to start?”

  • “Let’s start with our accounts payable.”

  • “That’s me,” Bob said. “Most of our vendors require that

  • we pay for everything within 30 days of making our purchase.

  • That means that 85 percent of our purchases are paid for

  • within the quarter they are made. And, before you ask, we

  • ordered $210,984 worth of inventory during the last quarter

  • last year, so we still owe 15 percent of that, or $31,648.”

  • “Thanks, Bob, but I actually knew that last part. After all,

  • it’s right there in the balance sheet.”

  • “Oh, yeah,” Bob said turning pink. “I forgot about that.”

  • Sarah laughed. “So, you calculated it by hand?”

  • “Well, yeah. I wanted to be prepared for the meeting today.”

  • “All right, you two,” said Nicole, jumping in before

  • Sarah could pick on the young man any more. “Let’s move

  • on to our overhead assumptions.”

  • “Sure,” Sarah said. “Last year we allocated variable

  • overhead at $1.50 for each direct labor hour. This year, I

  • think that we’re going to need to increase that to $2.00 to

  • cover increases in security fees, utility rates, and energy

  • prices. We also spend about $160,000 a quarter in fixed

  • overhead. Also, don’t forget that we usually use total direct

labor hours to calculate a predetermined overhead rate whencalculating the unit cost.”

“Unit cost?” asked Bob. “Oh, wait,” he said nodding, “Iremember. We have to include direct materials, direct labor,and manufacturing overhead to get the cost of producingeach unit. Direct materials are calculated from the recipe anddirect labor cost from the employee information that Philgave you. But we need to multiply the number of hours ittakes to make each product by the predetermined overheadrate so that we can figure a per-unit applied overheadamount. Sorry to interrupt.”

“No problem.” Nicole nodded approvingly at the youngintern while finishing up her notes. “Just one last question,Sarah. How much of that overhead is from depreciation?”“Eight percent of the fixed amount.”

“Good. Bob, tell me about our sales costs.”“Well, we don’t really have that much in variable salescosts. We give a one percent commission to our sales staff.”“Is that based on profit or sales price?” Sarah asked.“Total sales price. Sorry, I forgot to mention that. Thecommission is paid both for business sales and sales in thecafé. Also, here’s the table of fixed selling and administrativeexpenses.”

Exhibit 2

List of Selling and Administrative Expenses

S&A Expense

Advertising

Cleaning supplies

Janitorial service

Office staff salaries

Office supplies

Rent – Office

Sales salaries

Top management salaries

Utilities – Office

Total

Cost/quarterd$ 40,0001,0006,00025,0003,0009,00035,00080,0001,800$200,800Nicole took the paper. “Thanks. Okay, Sarah, tell meabout our debt.”

“Well, at the end of last year, we secured a $1,109,969mortgage at 6 percent interest. Our payment each quarter is$20,000. Since it’s a mortgage, the calculations are kind offun. Each payment requires us to pay a bunch of interest anda little bit of principal. To break up the $20,000 into the twoparts, we have to multiply the current mortgage value by 6percent and divide by 4. . .”

IMA EDUCATIONAL CASE JOURNAL VOL. 2, NO. 2, ART. 3 JUNE 2009

  • “Divide by 4?” asked Bob.

  • “Well, yeah, 6 percent is the annual rate. Since we make

  • quarterly payments, we divide the annual rate by 4.”

  • “Oh,” Bob said sheepishly. “I should have remembered that.”

  • “Yes, you should have,” Nicole said with a smile. She was

  • very pleased with how well Bob was progressing during his

  • summer with the firm. Hiring an intern had been one of her first

  • changes, and it seemed to be working out well. If the company

  • continued to grow, maybe he could be hired full-time once he

  • graduated in a couple of years. “Go ahead, Sarah.”

  • “Right. So, our first payment will be made at the end

  • of the upcoming quarter. We’ll end up paying $16,650 as

  • interest and $3,350 in principal. This means that the value

  • of the mortgage in the second quarter will be $1,106,619.

  • That’s the original $1,109,969 minus the $3,350, Bob.”

  • “Thanks, Sarah. I appreciate the help,” Bob retorted,

  • rolling his eyes.

  • “I appreciate it, too,” Nicole said. “If I remember right,

  • we have to pay the $20,000 each quarter. Our contract

  • prohibits us from paying any additional principal for the first

  • three years.”

  • Sarah nodded. “Yep. Kind of a bummer, but that was the

  • only way we could get that 6 percent interest rate.”

  • “Okay,” Nicole said. “The last thing is a recap of how we

  • handle income taxes. I think that has pretty much stayed the

  • same?”

  • “It sure has,” Bob responded, rifling through a tax folder.

  • “Our corporate tax rate is 30 percent and a portion of our

  • estimated taxes must be paid each quarter to avoid late fees.

  • Our policy is to pay 110 percent of the taxes that we owed

  • last year over the course of the current year. Since we paid

  • $15,000 last year, we will need to pay $16,500 this year.”

  • “And we’ll pay that equally over the four quarters?”

  • “Right. At the end of the year, we calculate our actual

  • taxes owed as 30 percent of net income. Any difference

  • between the cash we paid for taxes over the year and actual

  • income tax expense on the income statement is put into

  • income taxes payable if we haven’t paid enough and into

  • deferred tax assets if we paid too much.”

  • “Right,” Nicole said. “I think that’s about it.”

  • “Don’t forget the balance sheet from last year,” Bob said,

  • handing her a sheet of paper.

  • “Thanks. I’m starting to lose track of everything. I must

  • be getting old.”

Exhibit 3

Balance Sheet from Prior Year

Buns Bakery Balance Sheet

As of December 31, Year 1

Assets

Current Assets

Cash

Accounts Receivable

Raw Materials Inventory

Finished Goods Inventory

Total Current Assets

Property, Plant, and Equipment

Land

Building

Equipment

Accumulated Depr – Equipment

Total PPE

Total Assets

Liabilities and Stock holders’ Equity

Liabilities

Accounts Payable

Mortgage Payable

Total Liabilities

Stockholders’ Equity

Common Stock (no par value;

150,000 shares outstanding)

Retained Earnings

Total Stockholders’ Equity

Total Liabilities and Stockholders’ Equity

$ 40,000812,02521,09813,831$ 886,954$ 75,000568,000750,000(90,000)1,303,000$2,189,954$ 31,6481,109,969$1,141,617$ 150,000898,3371,048,337$2,189,954“Oh, I wouldn’t say that,” Bob quipped, then added witha grin, “at least, not as long as you’re my boss.”MEETINg wITh ThE CEO

“So, how goes the battle, Nicole?” Andy asked as she cameinto his office.

“Oh, it’s going. Actually, I think we’re just about there.I just need to check some numbers with you, and I’ll be allset. Then it’s just a matter of actually creating the budget.That’s the fun part, you know.”

IMA EDUCATIONAL CASE JOURNAL VOL. 2, NO. 2, ART. 3 JUNE 2009

  • Andy laughed. “Right. That’s why you’re the accountant

  • and I’m not. So, what do you need?”

  • “First, I just want to confirm a couple of things from

  • some earlier meetings. You told me a couple of weeks ago

  • that the board of directors now wants us to have $40,000

  • worth of cash on hand at all times and to pay $25,000 in

  • dividends each quarter. Is that still the plan?”

  • “Yes it is. I think it’s a little restrictive myself, but

  • sometimes we have to do as we’re told. Because of the

  • expansion, though, we are going to have to issue another

  • 50,000 shares of common stock to the venture capital firm

  • in the first week of the third quarter. We won’t plan on

  • changing our dividend payment schedule this year, but we

  • will probably have to increase the amount we pay in future

  • years. For now, though, the big factor is the capital infusion

  • of $400,000 we’ll get from selling our stock.”

and any payments are made at the end of the quarter. Thatensures that the interest estimates should be fairly accurate,even with the simple interest calculation.”

“I think you lost me somewhere in there.”

“Sorry about that. Sometimes I go too fast. To getour interest payments when we repay our line of credit(assuming that we have any to repay and the funds to makea payment), I will multiply the amount I’m repaying timesthe quarterly interest rate times the number of quartersthe money has been outstanding. So, if we draw $1,000 onthe line of credit in the second quarter and repay it in thethird quarter, I will multiply $1,000 by 2 percent and againby 2 percent for the two quarters that I assume it’s beenoutstanding. Does that help?”

“Not really, but I think I understand enough that I canexplain your assumptions if I have to.”

  • “In the third quarter? Why are they waiting that long?”

  • Andy shrugged. “Because that’s when they will have the

  • money to make the investment. They’re waiting for another

  • deal to go through.”

“Well, let me try again . . .”

“No, don’t worry about it,” Andy said quickly. “As longas I know about what you’re doing, and I don’t have to do itmyself, I’m good with just about anything.”

  • “Okay, so increase common stock issued by 50,000 shares

Nicole grimaced. “Thanks. I think I’ll estimate my salary- and paid-in-capital by $400,000 in the third quarter, got it.

  • My next question is about the expansion to our PPE that you

  • just mentioned. I estimate that we will need to buy $75,000

  • worth of new equipment in the first quarter, $100,000 in

  • the second, $50,000 in the third, and $35,000 in the fourth.

  • Since many of our long-term assets have already been fully

  • depreciated, this new expansion shouldn’t significantly

  • change my depreciation estimates. Does that sound about

  • right to you?”

  • “Assuming we get this arrangement settled, it sounds

  • perfect.”

  • “Can you give me a few more details about what else

  • we’re hoping to get from these new investors? I’ll need to

  • include those estimates.”

  • “Sure. What we are really hoping for, other than the

  • purchase of 50,000 shares of stock of course, is a $1 million

  • revolving line of credit. Basically, if we need additional

  • funding we can pull on the line of credit. The interest rate

  • on the new credit line will be 8 percent and they will require

  • that we pay off any accumulated interest before we repay

  • any principal.”

up a couple hundred thousand,” she said jokingly.PART II – USINg ThE MASTER BUDgETMEETINg Of ThE SENIOR STAff (2 wEEkS LATER)“Alright, everyone, let’s settle down and get to work.”Everyone took their seats around the table as Andy, BunsBakery’s CEO, shuffled through his papers. “As youknow, the venture capital firm we are hoping to work withhas indicated that it will not approve the deal unless wecan demonstrate a strong projected EPS, cash flow fromoperations, and profit margin. Since you have all had achance to review our new master budget and our pro formafinancial statements, you know that we’re in bit of troublealong those lines. To put it bluntly, the numbers we arecurrently showing are not good enough for the deal. No deal,no funds. No funds, no growth. No growth, no big bonuses.”He paused for a moment. “So, does anyone have any ideasfor ways that we can legitimately improve our numbers?”“What exactly do you mean by ‘legitimately’?” Phil, thehead baker, asked.

  • “Well, I think that gives me everything I need. Just so

“I mean ways that we can change our policies or- you know, I am going to use simple interest calculations for

  • the interest estimates. It’s not 100 percent accurate, but it is

  • typical for creating a master budget. It also simplifies things

  • considerably and ensures that information flows through the

  • budget easily. I’ll also assume that any additional debt from

  • the line of credit is taken out on the first day of the quarter

procedures.”

“I guess that means my idea of robbing a bank is out,”Phil said dryly.

“And my idea of simply randomly changing numbers,”agreed Sarah, the part-time staff accountant.

IMA EDUCATIONAL CASE JOURNAL VOL. 2, NO. 2, ART. 3 JUNE 2009

  • “Well,” Jeff, the head of marketing, said, “I think I have

  • a legitimate idea. We could increase our sales commissions

  • to 2 percent. That should motivate our sales force to sell

  • more. I’d say that would increase our sales growth from 5 to 8

  • percent each quarter.”

  • “For my part,” Phil jumped in, “we could switch to a

  • JIT inventory system, keeping only about 3 percent of our

  • needed raw materials on hand. That would cut down on

  • some of our costs, but it would also require us to pay for our

  • entire inventory in the quarter it is purchased rather than

  • paying 15 percent in the following quarter like we do now.”

  • Nicole, Buns’ new controller, shook her head. “I think

  • our best bet is to speed up our collections. We’re too loose

  • with our credit. If we were to add an additional collections

  • specialist to our office staff, we could improve our collections

  • to be 80 percent in the first quarter, 15 percent in the second

  • quarter, and 5 percent in the third quarter. That would

  • certainly improve our cash flows. Given the job market right

  • now, I think we could hire a good collections specialist for

  • $30,000 a year.”

  • “They might help collections,” argued Jeff, “but those

  • kinds of tactics could hurt our sales. Our relaxed collections

  • policy is one of the things that set us apart from other

  • vendors. If you decide to try that, Andy, you’d better plan on

  • an additional 3 percent drop in sales the first quarter.”

  • The table started to buzz with conversation as the

  • managers discussed the different options that had been

  • presented. In the confusion, Nicole took her chance to lean

  • over to Jeff. “Don’t you want to tell them?”

  • “Tell them what?” he said innocently.

  • “That you have us dropping our sales by too much in the

  • first quarter! If we changed our current 20 percent estimate

  • to a more realistic drop, it would take care of everything!

  • Based on the research I’ve been doing in the industry, we

  • could use 10 percent instead of 20. Think about it. Our EPS

  • would be higher and so would our cash flow from operations.

  • Why, even our profit margin would increase because our

  • fixed costs would be allocated over more units.”

  • Jeff frowned at her. “It wouldn’t improve everything,

  • Nicole. It would totally kill my bonus. Look, the raise in

  • price is a good idea with these other changes we are making. I

  • mean, we’re going to need the extra cash, but that is going to

  • cost us some sales. I’d much rather be conservative and get a

  • great bonus than give them a rosy number and get fired.”

  • Nicole sighed. “Jeff . . .” she tried again.

  • “Another option,” Jeff said loudly, before Nicole could

  • start in on him again, “would be to not raise our prices as

  • drastically. Let’s say we only increased our prices to $5.75

  • for muffins, $5.00 for cookies, and $5.50 for bread. By my

calculations, that would lead to only a 12 percent drop insales in quarter one with 7 percent growth in each of thefollowing quarters.”

Nicole frowned. Given Jeff’s pattern, it would be morelike a 2 percent drop, not 12 percent. Then she sighed.She couldn’t win this argument with Jeff, especially not inthe middle of a meeting with everyone else watching andlistening. Besides, if she brought it up now, they wouldwonder why she hadn’t brought it up before. They mighteven think that she’d been trying to get a bigger bonus forherself. And she would certainly make an enemy out of Jeff.Their relationship was already strained. No, she couldn’t sayanything here. She’d just have to let it go and hope that oneof the other ideas would work out. Besides they really wouldlook better if they pulled off a significant improvement thisfirst year. And if that happened, would it really matter that Jeffhad manipulated his way to a nice fat bonus? “Well,” she saidafter a few more minutes, “I think these are all good ideas, butI’m not sure that we’ll want to try all of them. If we changetoo much at one time the assessment team might think thatwe are just trying to fake our numbers to give them what theywant. I would suggest making one or maybe two of thesechanges for now, then provide them with a written explanationof the other ideas we want to try moving forward.”“I agree, Nicole,” Andy said. “Why don’t you run thenumbers, including how these changes would affect our useof the line of credit, to see which of the changes will giveus the most bang. We’ll go ahead and make that changenow and add the others to our improvement plan. Thatway, we can go to them with a current improvement anda plan to keep improving.” He looked around the table.“And if anyone gets any other ideas, let us know. The moreimprovements we take to the table, the better our chances ofsigning the deal.”

ABOUT IMA

With a worldwide network of nearly 60,000 professionals,IMA is the world’s leading organization dedicated toempowering accounting and finance professionals to drivebusiness performance. IMA provides a dynamic forum forprofessionals to advance their careers through CertifiedManagement Accountant (CMA®) certification, research,professional education, networking and advocacy of thehighest ethical and professional standards. For moreinformation about IMA, please visit www.imanet.org.IMA EDUCATIONAL CASE JOURNAL VOL. 2, NO. 2, ART. 3 JUNE 2009

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