What does a case study question look like?
As you are aware, our budgets are prepared annually on an incremental basis and operational managers have limited involvement in budget setting. The Maintenance Department, led by Cole Whitmore, supports all four production departments and looks after our specialist machinery, including the laser cutting machines, sewing machines, pole bending machines, spray booths and wind tunnel.
Peter Trafford, Finance Director, believes this would be an ideal opportunity to trial the use of zero based budgeting (ZBB) to establish the next budget for the Maintenance Department.
Please prepare briefing notes for the directors which explain:
How a ZBB approach can be applied to create a budget for the Maintenance Department. [sub-task (a) = 26%]
The two benefits and two challenges of using ZBB to prepare this budget. [sub-task (b) = 24%]
Secondly, Talia Morel, Sales & Marketing Director, has noticed that the Essential Solo is budgeted to earn a gross profit margin of only 5.4%, and that its average retailer price of T$127.50 is below its total production cost per unit of T$135.56. She has asked whether we should stop selling the Essential Solo through retailers. The budgeted figures for the Essential range are in Table 1 (attached).
Please also explain:
The meaning of the cost per unit figures and the gross profit margins shown in Table 1. [sub-task (c) = 24%]
How to make the decision about whether to continue selling the Essential Solo through retailers, using a contribution approach rather than full cost. [sub-task (d) = 26%]
Thank you,
Katy Mikkleson
Table 1: Essential range budget, year ending 30 June 2027
| Solo | Duo | Family | |
|---|---|---|---|
| Sales volume: website (units) | 5,250 | 3,150 | 4,550 |
| Sales volume: retailers (units) | 2,250 | 1,350 | 1,950 |
| Average price: website (T$) | 150.00 | 280.00 | 420.00 |
| Average price: retailers (T$) | 127.50 | 238.00 | 357.00 |
| Cost per unit (T$) | Solo | Duo | Family |
|---|---|---|---|
| Raw materials | 66.50 | 107.95 | 174.30 |
| Direct labour | 22.80 | 29.60 | 34.40 |
| Variable overhead | 9.25 | 11.89 | 13.83 |
| Fixed overhead | 37.01 | 47.54 | 55.30 |
| Total cost per unit | 135.56 | 196.98 | 277.83 |
| Gross profit margin | 5.4% | 26.4% | 30.7% |