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Question 6

It is October 1, and your department's year-to-date revenue is 20% less than what you had budgeted year-to-date. The run rate has jumped sharply since July, while your total expenses are right on budget. One-half of your annual bonus depends on achieving budgeted revenues by the end of the year, and one-half on achieving budgeted gross margin. What action should you take?

Click the button next to the correct answer choice. After you have read the feedback, explore the other choices. Note: Your first selection will be used in tallying your score.

  • Reduce prices and increase spending on advertising and marketing

  • Not the best choice. You shouldn't change prices or increase spending unless you've identified what has caused the revenue shortfall. A better move would be to look at the rising run rate and consider its implications. The rising run rate indicates that sales are increasing at current prices, suggesting that the revenue shortfall is due to events in prior months. For example, perhaps sales are seasonal or were affected by other external factors. However, expenses did not decline along with revenue, and as a result you may not be able to achieve the budgeted gross margin even if sales recover. By reviewing expense items, you may be able to identify adjustments you can make to bring expenses into line with the reduced revenue.

  • Increase prices as well as spending on advertising and marketing

  • Not the best choice. You shouldn't change prices or increase spending unless you've identified what has caused the revenue shortfall. A better move would be to look at the rising run rate and consider its implications. The rising run rate indicates that sales are increasing at current prices, suggesting that the revenue shortfall is due to events in prior months. For example, perhaps sales are seasonal or were affected by other external factors. However, expenses did not decline along with revenue, and as a result you may not be able to achieve the budgeted gross margin even if sales recover. By reviewing expense items, you may be able to identify adjustments you can make to bring expenses into line with the reduced revenue.

  • Examine expense items to see if there are any adjustments to spending that you should make

  • The best choice

    Correct choice. The rising run rate indicates that sales are increasing. And if this continues, sales may come in on budget by the end of the year. The greater risk, and one over which you have more control, is that you will not meet the budgeted gross margin unless you reduce expenses to match the shortfall in revenue.

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