Car Hire Contract Template

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					MBA 710
Strategic Cost Management
Winter 2010
Dr. Dave Bukovinsky

ACTIVITY-BASED BUDGETING EXERCISE

PURPOSE:

The purpose of this assignment is to familiarize students with the process of determining resource needs and the cost of
those resources within the context of an operational budget.

REQUIREMENTS:


You are the acting sales department manager at Tyler Industries, Inc. The sales forecast for the following year has been
developed, along with estimates of various other activities the sales department will conduct. You task is to develop a
budget for the resources needed to allow the department to accomplish its goals. You will then allocate the resource
costs to the activities to be conducted by the department. This will form the first-stage allocation for Tyler’s newly
instituted activity-based costing/customer analysis system. An Excel budget template is attached and should be used to
complete this assignment. Do not download and print the template and then complete it by hand. Use Excel.

Answer the following questions after completing the required budgets:

1. Assume you could require the salespeople to work overtime. They would be paid 1½ times their normal wage rate for
the overtime hours only. Overtime must be whole hours, not fractional hours. Would it be financially beneficial to have
fewer salespeople, but have them work overtime? Do not worry about excessive overtime hours. Calculate the
individual relevant costs and total costs of working overtime and of not working overtime. Present the results in a table.
You do not need to allocate the costs to individual activities.

2. Go back to the original scenario (no overtime). Assume the salespeople could reduce the amount of time they spend
in their cars by 60% if they made better use of the company's existing telecommunications technology to work with
customers. How much would that save Tyler Industries? Present your calculations in a table. You do not need to
allocate the costs to the individual activities.

3. Go back to the original scenario. Management is seeking ways to reduce costs. One cost that has come to
management's attention is post-sale support. Management believes that eliminating post-sale support would reduce
sales and number of orders by 10%. Would this be a good idea? Calculate the amount by which Tyler would be better
or worse off by eliminating post-sale support.
Assumptions:
a. Everything related to post-sale support will be eliminated (hours, miles driven, etc.).
b. Sales revenue and the number of orders will be reduced by 10%.
c. Sales revenue reflects a 50% markup over the cost of the goods sold. Therefore, cost of goods sold is 1/3 of sales
revenue.
d. Sales calls per order, new customer contacts and percent of contacts becoming customers will not change.
Hints:
a. You may want to do a side-by-side comparison of the original information and budget with the revised amounts.
b. Reduction in sales also causes a proportionate reduction in cost of goods sold and gross profit.
c. You do not have to allocate the costs to the individual activities.

4. Why is the activity-based method of budgeting better than the “let’s take last year’s budget and increase (or decrease)
it by X%?

GRADING:

This project is worth 25 points. Grading will be based on the accuracy of calculations and the quality of your answers to
the questions. I will not accept calculations done by hand. Excel is a wonderful tool. If you don’t know how to use it,
learn.

DUE DATE: Monday/Wednesday class: Monday, March 1st.
         Friday class: Friday, March 5th.
BACKGROUND INFORMATION:

This assignment requires you to determine the appropriate amount of resources, and the cost of those resources,
needed to achieve a particular goal. Tyler Industries sells industrial supplies to commercial customers. As manager of
the sales department, you oversee a staff of salespersons who perform the following activities: 1) make sales calls, 2)
negotiate contracts with new customers, 3) assist in the processing of orders, 4) identify and cultivate new customers, 5)
train new customers in the use of Tyler’s products, and 6) provide post-sale support to customers. Your sales force is
salaried, based on 2,000 hours per year from each salesperson. Any hours in excess of the number necessary to
complete the required duties is simply “idle time” with no benefit.

The company leases a car for each of its salespeople on an annual basis and is also responsible for fuel, taxes and
insurance on the cars.

Various types of printed promotional and educational materials and supplies are provided to the sales force.

Additional details about the activities and resources of the sales department are provided on the budget template.

COMMENTS AND CLARIFICATIONS:


You are to prepare two budgets for the year. The first is a functional budget broken down by type of cost. This budget
will indicate the cost associated with each of the major resources. The second budget is an activity budget broken down
by the cost to perform each major activity and the cost of idle time, if any. The activity budget is an allocation of the costs
of the functional budget to activities (i.e., how much of total sales staff wage cost relates to making sales calls, etc.).

Begin by determining the number of salespeople needed for the year. This will be based on the various activities which
must be performed and the time required for each activity. Note that you cannot hire fractional salespeople, so you must
round up when determining the number of salespeople needed.

The functional budget can be prepared once the number of sales people is known.

To prepare the activity budget, allocate wages to the activities based on the number of hours of time required for each
activity. Note that the hours for each activity include productive hours (performing the activity) and non-productive hours
(driving to/from the location where the activity is performed). Idle time consists of any available time remaining after all
activities are completed. Therefore, you must first determine how many hours are used by the other activities, then
subtract that from the total hours available to determine the number of hours of idle time.

Printed materials and supplies are allocated to each activity based on the productive time required for each activity. Note
that not all activities require the use of printed materials and supplies.

Vehicle fuel and maintenance costs are allocated to the activities based on miles driven to perform the activity.

Vehicle leasing, taxes and insurance are allocated proportionately, based on hours required for each activity, to all
activities including idle time, as these costs are incurred whether the vehicles are used or not.

A template for the budgets is provided in the attached Excel worksheet.
                       Tyler Industries, Inc.
                    Sales department budget
         For the budget period ending December 31, 2009


Total estimated sales revenue                        $ 7,200,000

Total number of orders (incl. new customer orders)            500

Average number of sales calls needed per order
received                                                       2.5

Estimated number of new customer contacts                      40
Percent of new contacts becoming customers                    10%    A contract is negotiated with each new customer

Miles driven by salespeople
 Sales calls                                               19,000
 Contract negotiations                                      2,000
 New customer development                                   6,000
 Customer training                                          8,000
 Post-sale support                                         20,000
Total miles                                                55,000

Hours needed                                          Sales staff
Sales calls                                                          Average time required for each call                           1    hours
Contract negotiations                                                Average time required for each contract negotiated            6    hours
Order processing                                                     Average time to process each order                           45    minutes
New customer development                                             Average time spent with each new contact                      3    hours
Customer training                                                    Average time spent with each new customer                    15    hours
Post-sale support                                                    Average time spent supporting each order                      7    hours
Driving                                                              Average speed                                                40    miles/hour
Total hours needed

Salespeople needed                                                   Based on 2,000 hours per salesperson

Hours provided by salespeople

Idle hours




FUNCTIONAL BUDGET

Sales staff wages                                                    Annual salary                                           $ 80,000
Printed materials and supplies                                       Cost per hour (excluding driving and idle time hours)   $      4
Vehicle fuel and maintenance                                         Average cost per mile                                   $   0.50
Vehicle leasing                                                      Cost per vehicle per year                               $ 4,800
Vehicle taxes and insurance                                          Cost per vehicle per year                               $    900
Budget total
ACTIVITY BUDGET

Making sales calls
Sales staff wages - productive
Sales staff wages - driving
Printed materials and supplies
Vehicle fuel and maintenance
Vehicle leasing
Vehicle taxes and insurance
Activity total


Contract negotiations
Sales staff wages - productive
Sales staff wages - driving
Printed materials and supplies
Vehicle fuel and maintenance
Vehicle leasing
Vehicle taxes and insurance
Activity total


Order processing
Sales staff wages - productive
Printed materials and supplies
Vehicle leasing
Vehicle taxes and insurance
Activity total


New customer development
Sales staff wages - productive
Sales staff wages - driving
Printed materials and supplies
Vehicle fuel and maintenance
Vehicle leasing
Vehicle taxes and insurance
Activity total


Customer training
Sales staff wages - productive
Sales staff wages - driving
Printed materials and supplies
Vehicle fuel and maintenance
Vehicle leasing
Vehicle taxes and insurance
Activity total


Post sale support
Sales staff wages - productive
Sales staff wages - driving
Printed materials and supplies
Vehicle fuel and maintenance
Vehicle leasing
Vehicle taxes and insurance
Activity total


Idle time
Sales staff wages
Vehicle leasing
Vehicle taxes and insurance
Activity total

Activity grand total

				
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