MAC ASSIGNMENT GROUP 6

GUJARAT CONSUMER ELECTRONICS LIMITED

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 Executive Salaries Nature of expense Non-variable Partly Variable with sales volume Variable with Sales Volume Partly Variable with sales volume Non-variable Non-variable Non-variable Variable with Sales Volume Non-variable Partly Variable with sales volume Non-variable Non-variable Non-variable Partly Variable with sales volume Remarks Assuming OT & Contract employees

Office Salaries Salesmans Commission Travelling expense Stationery, office supplies and expense Postage Electricity Trade Discounts Donations Advertising expense Labor Welfare Expenses Rental Depreciation Other branch expense

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 Arunkumar through email dated 02-Jan-2013, Subject: IIM Indore - MAC Assignment - Group 6 Case clarification needed

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.