Cookie Business Final Presentation Now that you have completed running some calculations for the cookie business in Unit VII, you will present your findings. The learning objectives of this project al

COOKIE BUSINESS: FINANCIAL PERFORMANCE 1

Financial Performance Analysis and Strategic Recommendations for a Cookie Business: A Case Study

Eleni Kosters

ACC 5301 Management Applications of Accounting

Professor Bari Courts

24 October 2023

Abstract

This paper conducts a thorough financial analysis on the performance of a cookie business. The investigation encompasses an array of aspects – contribution margin, breakeven analysis, full and variable costing; special orders and internal rate-of-return; cash budgeting is also considered. Analytical methodologies are employed in the research process to derive insightful findings. The findings unveil robust profitability and significant merits for special orders; yet, they warrant a note of prudence in the face of prospective equipment investments. Drawing from this analysis–we propose strategic recommendations: to optimize profitability; refine product mix, enhance cost efficiency and bolster cash flow management. The paper presents invaluable insights: it is a resource that all stakeholders within the cookie industry should consult.

Cookie Business: Financial Analysis & Strategic Recommendations

Understanding the intricacies of financial performance is paramount to business sustainability and growth in the dynamic landscape of entrepreneurship. This paper conducts a detailed analysis on a cookie business, unravels key financial indicators, and proposes strategic recommendations. By comprehensively examining contribution margin, breakeven analysis, costing methods, special orders and investment decisions; it provides valuable insights into the industry's complex financial dynamics.

This paper dissects the contribution margin and breakeven point within this specific context, illuminating both profitability threshold and necessary sales volume for sustainability. By applying full- and variable-costing methods, it reveals essential considerations in financial reporting as well as internal decision-making. Moreover; through assessing a special order - an evaluation process that offers practical insight into revenue optimization - this study further extends its applicability. The nuanced approach required in capital allocation is exemplified by the investment decision regarding new equipment.

Part 1 Contribution Margin/Breakeven

Per Item Contribution Margin:

1. Chocolate Chip:

   • Contribution Margin: $0.79

For every Chocolate Chip cookie sold, the company earns a $0.79 contribution towards profit generation and coverage of fixed costs; this figure represents the per item contribution margin. After accounting meticulously for all variable costs linked to production and sales of one individual cookie – a sweet treat beloved by many – it becomes clear just how lucrative this operation can be despite its seemingly small scale: each crumb is worth more than meets initial eye!

1. Sugar:

   • Contribution Margin: $0.69

For each Sugar cookie sold, the company generates a contribution margin of $0.69; this represents the per item contribution margin for Sugar cookies.

1. Specialty:

   • Contribution Margin: $3.23

Specialty cookies present a notably higher per-item contribution margin of $3.23; this profitability suggests their effectiveness in covering fixed costs and bolstering overall profit.

Total Contribution Margin:

• Total Contribution Margin: $2,830,200.00

All types of cookies collectively provide the total contribution margin, which covers fixed costs and yields profits. The company views this as a pivotal gauge of overall profitability. The business boasts a substantial total contribution margin in this instance, signaling positivity for its operations.

Common Fixed Costs:

• Common Fixed Costs: $125,000.00

The company incurs these costs at a constant rate, undeterred by fluctuations in production levels; indeed, they remain unchanged regardless of the quantity of cookies produced: common fixed costs equate to an amount of $125,000. Enhancing profitability crucially hinges upon the management and minimization of these costs.

Profit:

• Profit: $2,705,200.00

After deducting all expenses, including both fixed and variable costs, from total revenue: the $2,705,200.00 profit represents a strong indication of the company's financial health and success; it is–in essence–the business' actual financial gain.

Weighted Average Contribution Margin:

• Weighted Average Contribution Margin: 1.0181

Taking into account the sales mix of various cookie types, the weighted average contribution margin offers a more precise representation of overall profitability. If its value surpasses 1: this implies that each cookie sold--on average; contributes more towards profit generation and covering fixed costs than its unit cost.

Break-even Point in Units:

• Break-even Point (in Units): 122,783

The break-even point: this crucial threshold equates total revenue to total costs, resulting either in zero profit or loss. Every cookie sold beyond this point actively generates profit; thus, to reach the break-even point—a critical milestone—the company must sell approximately 122,783 cookies in this instance.

Part 2 Full and Variable Costing

Direct material: $0.60; direct labor--$1.00; and variable manufacturing overhead--$0.40 comprise the breakdown of production costs for each cookie, culminating in a unit's total variable manufacturing cost of $2.00. Beyond these fluctuating expenses lies an annual anchor: fixed manufacturing overhead costs that amount to $139,000 . Further still—tacking onto this financial vessel—are unyielding additions such as fixed selling costs ($50 , 000) per annum and administrative expenditures which hold steady at roughly double that figure: a formidable sum indeed ($65 , 000). The company produced a substantial 2,780,000 cookies and sold 2,600,000 of them; each cookie carried a selling price of $3.75.

The full (absorption) costing method calculates the full unit cost, including both variable and fixed costs, to be $2.05. This calculation incorporates all direct expenses and allocates a portion of the fixed manufacturing overhead. The period concludes with an ending inventory valued at a total absorption cost of $369,000. Accurate financial reporting and tax considerations hinge critically upon this figure.

In contrast, variable costing considers only the production's directly linked variable costs; this results in a per unit cost of $2.00. The calculation does not factor in fixed manufacturing overhead. Thus, under variable costing, we arrive at an ending inventory value of $360,000 - marginally less than what the full-costing approach yields.

The significant implications for financial reporting, taxation, and internal decision-making stem from this distinction between full costing and variable costing: Full costing aligns with Generally Accepted Accounting Principles (GAAP); it is used in external financial reporting – as well as tax purposes. On the other hand, valuable insights for managerial decisions internally emerge through the employment of variable costing.

Part 3 Special Order

In this scenario, we have received a special order for 1,000 cookies; each cookie is offered at a discounted price of $2.75--significantly lower than the normal rate of $3.75 per unit. However: there are additional costs involved with fulfilling this unique request. The customer specifically asks for a distinct printed design on every cookie--an enhancement that adds an extra cost of $0.50 per unit to our standard pricing structure. Furthermore, facilitating the design process requires an investment of $100 in a specific tool.

Upon meticulous evaluation: this special order generates a revenue of $2,750. Nonetheless--one must crucially consider the accompanying costs. The design incurs a cost of $500; furthermore, an extra $100 adds to this total for tooling expenses. Fulfilling the special order incurs a total cost of $600. Considering the revenue and costs, this special order contributes an increased net profit of $2,150.

Part 4 Internal Rate of Return

We are considering an investment: the purchase of new equipment--a venture that will cost $250,000 for our cookie business. We anticipate this strategic move to catalyze a yearly sales surge; specifically, we project an increase of approximately $48,017.50 annually.

The calculated Internal Rate of Return (IRR) stands at 8%, given an anticipated annual return on the investment over a seven-year period to be 8% with a required rate of return set as 9% within this time frame.

Let us now evaluate the investment based on this IRR to determine its acceptance or rejection. However, with a calculated IRR of 8%—falling beneath our acceptable rate of return at 9%—this evaluation suggests that the investment will yield returns below what is required. This analysis thus advises against accepting this specific investment.

Part 5 Cash Budget

The past months' sales figures demonstrate a fluctuating pattern, suggesting shifts in customer demand: in December of the preceding year, an impressive $250,000 sale was recorded; however--the figure plummeted to only half that amount at $125 000 for January but rebounded dramatically – soaring back up to reach $300 000 by February. In March, the cookie business experienced a drop in sales to $90,000; this decrease reflects its seasonal nature--notably peaking in February.

Notably, a substantial portion—80% to be exact—of the total sales revenue collects in the same month as the sale due to its favorable collection terms; this underscores an efficient cash flow management: it allows for immediate allocation and utilization of these funds. The remaining 20%, however, undergoes collection within one month post-sale—an integral part of maintaining healthy financial operations. Indeed, this well-structured approach not only enables expense coverage but also fosters investment in burgeoning opportunities–a testament to savvy business acumen.

In January, the estimated cash receipts break down as follows: $50,000 from December sales; and an additional $100,000 from January sales--thus projecting a total of $150,000 in estimated monthly cash receipts. Moving to February: we collect $25,000 from outstanding January transactions while significantly more—specifically $240 000—is garnered through burgeoning February commerce. Total estimated cash receipts of $265,000 result from this. In March, the collection of $60,000 from February sales and an additional $72,000 from March sales contribute to a total estimate for cash receipts amounting to $132,000.

Part 6 Material and Labor Variance

Incurring $225,000 in direct material costs during production--a slight increase from the standard cost of $224,800 set for direct materials--, we observed an unfavorable Materials Price Variance of $(7,452); this suggests that our actual expense on materials surpassed what was initially projected as standard expenditure. Fluctuations in market prices or procurement from non-standard suppliers could attribute to this.

Moreover, in material usage: we employed 30 units--a departure from the standard utilization of 31 units; this resulted in an adverse Materials Quantity Variance worth $(7,252). The variance implies a higher use of materials during production than initial projections had anticipated. Inefficient handling or unforeseen wastage during the production process might cause this (Whitecotton, Libby, & Phillips, 2020).

Moving forward to labor costs: the actual direct labor rate stood at $15.50 per hour - a marginal increase from its standard counterpart of $15.00 per hour; this subsequently yielded an unfavorable Labor Rate Variance amounting to $(23). The variance serves as an indicator that hourly labor expenses surpassed the set standard rate, potentially owing such discrepancy factors as wage hikes or overtime use.

In terms of labor efficiency: the actual hours worked equaled 45, surpassing the standard 40. Consequently, a favorable Labor Efficiency Variance of $75 emerged; this suggests – through its positive implication – that our production process operated with greater efficiency than we had initially predicted. Consequently, fewer labor hours were utilized to yield an equivalent output; a testament to our optimal operational performance.

Conclusions and Recommendations

Conclusively, the analysis of the cookie business offers valuable financial performance insights: Contribution margin and break-even analysis underscore profitability; they also identify sales targets. Moreover--by delineating between full and variable costing methods--this study accentuates accurate financial reporting's significance (Garrison, Noreen, & Brewer, 2021). Before accepting special orders, one must evaluate all associated costs; this underscores the necessity of thorough consideration. Finally, in the pursuit of new equipment, caution is advised: it suggests a prudent investment decision.

These findings propose several recommendations: refine the product mix for higher profitability; implement cost-saving measures, and optimize operational efficiency. Additionally, we advise conducting market research for special orders – a prudent approach to capital allocation–and managing cash flow effectively. Moreover, adhering to accounting standards; conducting thorough risk assessments, and establishing customer feedback loops--these are the factors that will foster sustained success for the business. By tailoring these recommendations to its unique circumstances: it can amplify not only its financial performance but also strengthen its competitive position.

References

Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2021). Managerial accounting. McGraw-Hill.

Whitecotton, S., Libby, R., & Phillips, F. (2020). Managerial accounting. McGraw-Hill.