Mathew Philp, president of Ontario Mining Ltd., has made budgets a major focus for managers. Making budget was such an important goal that the only two managers who had missed their budgets in 2011 (by 2 percent and 4 percent, respectively) had been summarily fired. This caused all managers to be wary when setting their 2012 budgets. The Sudbury division of Ontario Mining had the following results for 2011: 

Molly Stark, general manager of Sudbury division, received a memo from Philp that contained the following: 

We expect your profit for 2012 to be at least $209,000. Prepare a budget showing how you plan to accomplish this. Stark was concerned because the market for copper had recently softened. Her market research staff forecast that sales would be at or below the 2011 level, and prices would likely be between $0.92 and $0.94 per pound. Her manufacturing manager reported that most of the fixed costs were committed and there were few efficiencies to be gained in the variable costs. He indicated that perhaps a 2 percent savings in variable costs might be achievable, but certainly no more. 

1. Prepare a budget for Stark to submit to headquarters. What dilemmas does Stark face in preparing this budget? 

2. What problems do you see in the budgeting process at Sudbury division? 

3. Suppose Stark submitted a budget showing a $209,000 profit. It is now late in 2012, and she has had a good year. Despite an industrywide decline in sales, Sudbury division’s sales matched last year’s 1.6 million pounds, and the average price per pound was $0.945, nearly at last year’s level and well above that forecast. Variable costs were cut by 2 percent through extensive efforts. Still, profit projections were more than $9,000 below budget. Stark was concerned for her job, so she approached the controller and requested that depreciation schedules be changed. By extending the lives of some equipment for two years, depreciation in 2012 would be reduced by $15,000. Estimating the economic lives of equipment is difficult, and it would be hard to prove that the old lives were better than the new proposed lives. What should the controller do? What ethical issues does this proposal raise?

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Sales, 1.6 million pounds @ $0.95/pound $1,520,000 Variable costs Fixed costs, primarily depreciation Pretax profit 880,000 450,000 $ 190,000