Problems:

P 6-2 Investment Banks

Rogers Petersen and Cabots are two of the five largest investment banks in the United States. Last year, there was a major scandal at Cabots involving manipulation of some auctions for government bonds. A number of senior partners at Cabots were charged with price fixing in the government bond market. The ensuing investigation led four of the eight managing directors (the highest-ranking officials at Cabots) to resign. A new senior managing director was brought in from outside to run the firm. This individual recruited three outside managing directors to replace the ones who resigned. There was then a thorough housecleaning. In the following six months, 15 additional partners and more than 40 senior managers left Cabots and were replaced, usually with people from outside the firm. Rogers Petersen has had no such scandal, and almost all of its senior executives have been with the firm for all of their careers.

Required: a. Describe zero-based budgeting. b. Which firm, Rogers Petersen or Cabots, is most likely to be using ZBB? Why?

P 6–4: Budget Lapsing versus Line-Item Budgets

a. What is the difference between budget lapsing and line-item budgets? b. What types of organizations would you expect to use budget lapsing? c. What types of organizations would you expect to use line-item budgets?

P 6–10: Potter-Bowen

Potter-Bowen (PB) manufactures and sells postage meters throughout the world. Postage meters print the necessary postage on envelopes, eliminating the need to affix stamps. The meter keeps track of the postage, the user takes the meter’s counter to a post office and pays money, and the post office initializes the meter to print postage totaling that amount. The firm offers about 30 different postage systems, ranging from small manual systems (costing a few hundred dollars) to large automated ones (costing up to $75,000). PB is organized into Research and Development, Manufacturing, and Marketing. Marketing is further subdivided into four sectors: North America, South America, Europe, and Asia. The North American marketing sector has a sales force organized into 32 regions with approximately 75 to 200 salespeople per region. The budgeting process begins with the chief financial officer (CFO) and the vice president of marketing jointly projecting the total sales for the next year. Their staffs look at trends of the various PB models and project total unit sales by model within each marketing sector. Price increases are forecast and dollar sales per model are calculated. The North American sector is then given a target number of units and a target revenue by model for the year. The manager of the North American sector, Helen Neumann, and her staff then allocate the division’s target units and target revenue

by region. The target unit sales for each model per region are derived by taking the region’s historical percentage sales for that machine times North America’s target for that model. For example, model 6103 has North American target unit sales of 18,500 for next year. The Utah region last year sold 4.1 percent of all model 6103s sold in North America. Therefore, Utah’s target of 6103s for next year is 758 units (4.1% × 18,500). The average sales price of the 6103 is set at $11,000. Thus, Utah’s revenue budget for 6103s is $8,338,000. Given the total forecasted unit sales, average selling prices, and historical sales of each model in all regions, each region is assigned a unit target and revenue budget by model. The region’s total revenue budget is the sum of the individual models’ revenue targets. Each salesperson in the region is given a unit and revenue target by model using a similar procedure. If Gary Lindenmeyer (a salesperson in Utah) sold 6 percent of Utah’s 6103s last year, his unit sales target of 6103s next year is 45 units (6% × 758). His total revenue target for 6103s is $495,000 (or 45 × $11,000). Totaling all the models gives each salesperson’s total revenue budget. Salespeople are paid a fixed salary plus a bonus. The bonus is calculated based on the following table:

P 6–13: Videx

Videx is the premier firm in the security systems industry. Martha Rameriz is an account manager at Videx responsible for selling residential systems. She is compensated based on beating a predetermined sales budget. The last seven years’ sales budgets and actual sales data follow. Videx sets its sales budgets centrally in a top-down fashion.