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 n 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:
Sales commissions – $128,000
Sales staff salaries – 44,000
Telephone and mailing – 42,000
Rental—office building – 21,000
Gas (utilities)- 12,800
Delivery charges – 72,400
Marketing consultants – 25,800
Your discussions with John and Susanna indicate the following assumptions and anticipated changes regarding monthly marketing expenses for the coming year:
1. Based on the preceding information, 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 $368,000. 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 10% increase in telephone and mailing costs. What must this percentage change (positive or negative) be in order to achieve targeted monthly marketing costs? (Hint: The Goal Seek function in Excel can be used to calculate the percentage changes, which can be found under Data, then What-If Analysis.)