Break Even Analysis and Planning

Flexible Budgeting

Flexible Budget

Levels (in millions)

Competitor

Corporate

Economic

10% Rate

9% Rate

% Rate

Revenue

Company Operating Stores

Licensed Stores

CPG, food service, & other

Total Revenue

Cost of Sales

Total Operating Expenses

Total Cost

Income from equity investees

Operating Income

Interest Income

Interest Expense

Earnings Before Tax

Income Tax

Net Earnings

This flexible budget was done for Starbucks Corporation and is an annual budget for the year 2012. Caribou Coffee is one of Starbucks Corporation's largest competitors. Caribou Coffee's annual projected sales growth for 2012 is 10%. (Caribou Coffee Reports Fourth Quarter and fiscal Year 2011 Results, 2012). Even though Caribou had a consolidated sales increase of 15.0% for the year 2011, for a competitive basis, a flexible budget was done based on the 10% annual projected increase for the year 2012.

Starbucks had a sales growth of 6% decrease for 2009, 7% increase for 2010, and an 8% increase for 2011. (Starbucks Investor Relations, 2011). The tax rate for 2011 was 31.1% and for 2010 was 34.0%, with 2012 tax rate projected for 33%. If profits increase 1%, then the taxes will probably increase the 1% as well. For a forward looking picture, the corporate rate was based on a 1% increase due to the sales growth of 1% more in 2011 than in 2010 and the year of 2009 was ignored due to being a bad year.

The economic growth rate for 2011 was an average of 1.625% quarterly increase. (United States GDP Growth Rate, 2012). The quarterly growth rates were 0.4 for quarter 1, 1.3 for quarter 2, 1.8 for quarter 3, and 3.0 for quarter 4. There are problems with the GDP. The per capita does not give much information for distribution of income in a given country. It does not take into effect the negative externalities, such as pollution from the economic growth. It does not take into effect the positive externalities that may result from services, such as education and health. And, it excludes the value of the activities outside the marketplace, such as leisure and organized crime, which are factors Starbucks Corporation faces. The annual growth rate comes out to 6.5% and it was used for the economic growth rate to figure into the flexible budget.

Managers are responsible for the controllable costs in their department, or unit, and for maximizing revenues. The flexible budget helps managers control the operations and compare actual results with planned objectives. (Accounting Principles, 8th Ed.). Flexible budgets provide feedback on operational activities by analyzing the differences and the causes of those differences. The comparable results show favorable and unfavorable conditions, which show managers what areas are performing well and which ones need changes. It helps in decision making where the production of goods and services are concerned.

Because labor costs are one of the biggest costs of any business, the labor per production unit, or sales, becomes very big issues. In order to control the labor costs, the constant comparisons of sales per labor hour must be evaluated to maximize the amount of sales for each labor hour. This helps managers know where training of personnel is needed. Training personnel to control costs and maximize sales is a big part of a manager's responsibility. How well employees perform their job tells how well a manager is performing in training personnel in cost cutting techniques and building sales revenue. For example, for Starbucks to maximize the amount of products it can make and sale, each product should have a certain amount of ingredients, depending on the individual products. If an employee is not measuring the ingredients, costs can rise by putting too much in one product. Depending on the taste of the outcome of the product, it can also hurt sales if the product is not made to certain specifications. The act of not measuring the ingredients for each product made can hurt business in more than one way.