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 Amount

Sales commissions .......$120,000

Sales staff salaries ....... 40,000

Telephone and mailing ...... 38,000

Rental—office building ..... 25,000

Gas (utilities) ......... 12,000

Delivery charges ........ 70,000

Depreciation—office furniture .... 8,000

Marketing consultants ...... 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 on a monthly basis by 10 percent.

• Sales prices are expected to decrease, to meet competitive pressures, by 5 percent.

• Sales commissions are based on a percentage of sales revenue.

• Sales staff salaries, because of a new hire, will increase by 10 percent per month, 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 percent. However, both of these categories of costs are variable with sales volume.

• Rent on the office building is based on a two-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 percent per month, 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 five-year useful life.

• Because of competitive pressure, the company plans to increase the cost of marketing consultants by $5,000 per month.

Required

1. Use the preceding information to develop an Excel spreadsheet that can be used to generate a monthly budget for marketing expenses. (Use the built-in function "SLN" to calculate monthly depreciation charges for the new equipment to be purchased.) 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, the president has expressed a desire to keep marketing expenses over the next few months to a maximum of $350,000. Discussions with the marketing department indicate that telephone and mailing costs are the only category, in the short run, that can reasonably bear the planned for reduction in marketing costs. The budget you have prepared includes an assumed 6 percent increase in telephone and mailing costs. What must this percentage change (positive or negative) be in order to achieve targeted monthly marketing costs?

3. Comment on the use of the budget in this situation for cost-control purposes.