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Q1. From the information given in Exhibit 1 and 3, determine, in so far as you can, whether each item of

expense is (a) non-variable, (b) partly variable with sales volume, (c) variable with sales volume, or (d)

variable with some other factor.

The classification of the expenses under the 4 heads is indicated in the table below:

Expenses Nature of expense Remarks

Executive Salaries Non-variable

Office Salaries

Partly Variable with sales

volume

Assuming OT & Contract

employees

Salesmans Commission Variable with Sales Volume

Travelling expense

Partly Variable with sales

volume

Stationery, office supplies

and expense Non-variable

Postage Non-variable

Electricity Non-variable

Trade Discounts Variable with Sales Volume

Donations Non-variable

Advertising expense

Partly Variable with sales

volume

Labor Welfare Expenses Non-variable

Rental Non-variable

Depreciation Non-variable

Other branch expensePartly Variable with salesvolume

Q3. Should the proposed sales expense budget be adopted ?

Assumption/Prior Information: To disprove the linear relationship between sales expense and sales

volume, we need actual sales data for at least one additional month . For a expense category, with given

slope we need at least additional coordinate(i.e. additional month sales data) to conclude objectively

that given expense category does not varies linearly with sales volume.

Hence this question is answered subjectively based on the guidance/direction provided by respected

Prof. G Arunkumarthrough email dated 02-Jan-2013, Subject: IIM Indore - MAC Assignment - Group 6 -

Case clarification needed

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Answer:

Proposed sales expense budget is not the best alternative to be adopted, as not all categories of sales

expense varies linearly varies with sales volume. Explained below with below four expense categories.

1. Travelling Expenses:Higher sales doesn't necessarily translate into higher travelling expense and

vice versa. Consumer electronics involves lot of travel engagements with distributors and consumers

by pre-sales/sales manager and not always every travel will be converted into sales volume. In fact

travelling more have no correlation in driving sales.

2. Other branch expenses:As per the case, other branch expense consists of branch office upkeep,

advertising and travel. These expenses normally does not vary linearly with sales. In practice most

non-core expenses which falls under maintenance category are outsourced on contract basis and

organization don't increase/decrease linearly based on sales volume. Organizations would prefer to

have expenses under fixed/partially variable category for a given financial year.

3. Advertising:High spend on ads doesn't always translate to high sales. Linear variation doesn't hold

true in many practical consumer electronics products.

Examples of few high Advertising in consumer electronics did not translate into sales volume:

1. Microsoft's WebTV

2. Apple's PDA device - NEWTON

3. Nokia's E-Series mobile

4. Stationery & Office supplies:Stationery and office supplies normally fixed and doesn't vary linearly

with sales volume. Tech savvy industry like consumer electronics would preferably moving towards

environment friendly office and documentations are mostly stored in electronic form. Hence there

exist no possibility of expenses varying linearly with sales volume.