Xellnet provides e-commerce software for the pharmaceuticals industry. Xellnet is organized into several divisions. A companywide planning committee sets general strategy and goals for the company and its divisions, but each division develops its own budget.

Lonnie Draper is the new division manager of wireless communications software. His division has two departments: Development and Sales. Chad Sanchez manages the 20 or so programmers and systems specialists typically employed in the development department to create and update the division’s software applications. Liz Smith manages the sales department.

Xellnet considers the divisions to be investment centers. To earn his bonus next year, Draper must achieve a 30% return on the $3 million invested in his division. Within the wireless division, development is a cost center, while sales is a revenue center. Budgeting is in progress. Sanchez met with his staff and is now struggling with two sets of numbers. Alternative A is his best estimate of next year’s costs. However, unexpected problems can arise when writing software, and finding competent programmers is an ongoing challenge. He knows that Draper was a programmer before he earned an MBA so he should be sensitive to this uncertainty. Consequently, he is thinking of increasing his budgeted costs (Alternative B). His department’s bonuses largely depend on whether the department meets its budgeted costs.

 

XELLNET Wireless Division Development Budget 2013
Â	Alternative A	Alternative B
Salaries expense (including overtime and part time)	$2,400,000	$2,640,000
Software expense	120,000	132,000
Travel expense	65,000	71,500
Depreciation expense	255,000	255,000
Miscellaneous expense	100,000	110,000
Total expense	$2,940,000	$3,208,500

Liz Smith is also struggling with her sales budget. Companies have made their initial investments in communications software so it is harder to win new customers. If things go well, she believes her sales team can maintain the level of growth achieved over the last few years. This is Alternative A in the sales budget. However, if Smith is too optimistic, sales may fall short of the budget. If this happens, her team will not receive bonuses. Therefore, Smith is considering reducing the sales numbers and submitting Alternative B.

XELLNET Wireless Division Sales Budget 2013
Â	Alternative A	Alternative B
Sales Budget 2013	$5000000	$4500000
Salaries expense	360,000	360,000
Travel expense	$240,000	210,500

Split your team into three groups. Each group should meet separately before the entire team meets.

Requirements

1. The first group plays the role of development manager Chad Sanchez. Before meeting with the entire team, determine which set of budget numbers you are going to present to Lonnie Draper. Write a memo supporting your decision. Give this memo to the third group before the team meeting.

2. The second group plays the role of sales manager Liz Smith. Before meeting with the entire team, determine which set of budget numbers you are going to present to Lonnie Draper. Write a memo supporting your decision. Give this memo to the third group before the team meeting.

3. The third group plays the role of division manager Lonnie Draper. Before meeting with the entire team, use the memos that Sanchez and Smith provided you to prepare a division budget based on the sales and development budgets. Your divisional overhead costs (additional costs beyond those incurred by the development and sales departments) are approximately $390,000. Determine whether the wireless division can meet its targeted 30% return on assets given the budgeted alternatives submitted by your department managers. During the meeting of the entire team, the group playing Draper presents the division budget and considers its implications. Each group should take turns discussing its concerns with the proposed budget. The team as a whole should consider whether the division budget must be revised. The team should prepare a report that includes the division budget and a summary of the issues covered in the team meeting.

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