Reena Patel is the store manager of the Stratford branch of a leading mobile phone company. She has received the following email from Head Office:
November 1st 2011: Budgets for December 2011, Stratford store
£s
Sales revenue: 420,000
Variable costs of phones: 210,000
Labour costs: 28,000
Other overheads: 6,000
Contribution to advertising budget 42,000
(10% of sales)
Contribution to head office (10%) 42,000
Profit for December: 92,000
All stores are reminded that no staff are allowed holiday time until
after Christmas.
after Christmas.
As she does every month, Reena checks the budget against her records of last December’s sales and costs. She then phones her Regional Sales Manager and asks: “Nick, did you have any input into the latest budgets? They’re crazy! They expect my sleepy store to do 40% more sales than last December, but with only 12% more labour costs! How can I motivate myself to achieve these, let alone my staff!” It quickly emerges that Nick knows no more than Reena about where the budget numbers came from.
Later in the day Nick phones Head Office, but he makes no headway in finding who set the budgets and why. He gives up quite easily, and gets on with other things. At 7.15, after closing up the shop, Reena phones again, but Nick makes it clear that she is cutting into his evening. “No, I couldn’t find it out, Reena, but it’s your job to hit those numbers.”
The following day does not run smoothly, as Reena is in a foul mood. She has to apologise several times to staff and customers, but cannot seem to stop herself. One junior member of the sales team is shouted at for reminding Reena that he’s flying to Nigeria in early December, to go to his sister’s wedding. Whirling around her head is the same point: ‘How can I boost sales by 40%; and if I don’t, I’ll lose the bonus I’ve worked hard for all year”.
Questions (25 marks; 30 minutes)
1. Last year’s December sales were £300,000. Outline two reasons why the mobile phone company’s Head Office might have decided that this year’s sales should rise by 40%. (4)
2. Explain two ways in which the business might have benefited from discussing this budget with Reena, instead of setting it from the Head Office.(4)
3. When December is over, it proves to be that sales are 10% below budget, and that labour costs are 5% above. All the other costs are as you would expect.
a) Set out the Budget, Actual and Variance figures for December.(6)
b) State two positive features of these figures.(2)
4. Discuss the ways in which this company’s process of budget setting could be improved in 2012.(9)
