A production manager is responsible for a production budget and can potentially earn an additional b

A production manager is responsible for a production budget and can potentially earn an additional bonus for minimising production costs and coming in below budget. Recently he was told informally by a supplier at a social event that the price for the most heavily used material at the factory will definitely be reduced by 10% during the next year, as the result of a recent official regulatory decision, to be announced shortly in the media.

The production manager has been asked to prepare next year’s budget urgently for the Production Director, so that the overall budgetary targets for the company may be finalised.

As he has not heard officially about the price reduction at the time of submitting the budget, the production manager includes the current year’s material cost price as the budgeted cost and bases his total costs on this, knowing that this will build some ‘slack’ into his budget when the price reduction eventually comes through.