You are the owner of your own cookie company. Fast growth and the need to expand have made it necessary for you to seek financing from a local bank. However, you need to show the banker your plans for the coming year. Using your own, unique data, you will prepare a comprehensive budget and pro forma financial statements in Excel to show the banker your projected earnings and financial position. Good luck getting that bank loan!
You knew they were good, but you never thought Grandma's old cookie recipe would bring you this far! It all started about three years ago when you began using your Grandma's cookie recipe to bake, what most people consider, the "best tasting cookies they have ever put in their mouth." After finishing college, you started baking cookies as a little side business. You bake them right in your home and sell them to friends and local stores. Response has been great! People love the cookies, and you are making a little extra money.
Your fast sales growth has negatives in addition to positives. The volume of business has grown so much that you can no longer keep up with demand. Your desire to grow this hobby into a full-fledged business has led you to explore expanding. You have been investigating new facilities and equipment, and checking into the requirements of hiring a few employees. However, there is one problem; you don't have the money to expand!
On the advice of a friend, you meet with a local banker. You share your dreams and ideas, and your need to borrow some money. The banker is encouraging and helpful. However, she states that the bank cannot lend you any money without a business plan that describes your financial results, marketing strategy, and projections for the future. You show the banker your income statement and balance sheet as of the most recent year-end, and the banker is impressed! "Looks very promising," she states. "But what I really need to see is what you plan to do with the money that I will lend you and what your business will look like next year."
When you return home after the meeting, you pull out your old college accounting textbook. You realize that this is a master budget problem just like you did in college. After reviewing your class notes and reading the textbook, you settle in to produce a plan for next year. You also send an email to your old professor asking for his help in this project. He responds with an enthusiastic “yes!”.
ASSIGNMENT PART 1 (60 Points)
You immediately realize that you must gain an understanding of your cost structure and of the relationship between your revenues, costs, and profits. You pull out Grandma’s recipe to see what ingredients it takes to make a dozen cookies. Next, you go to your invoice files to determine the cost of each of the ingredients. You brainstorm to develop a list of the new costs that you must incur when you expand your operations. After analyzing all of this data you are able to break out your costs into several categories. You realize that some costs are for raw materials while others are related to manufacturing overhead or operating expenses. You also realize that some costs appear to be fixed while other costs are variable. Now you have sufficient information to determine how much money you can make when you sell these cookies.
Requirements for Part 1:
1. Think of your favorite cookie recipe or search the Internet and find a recipe for a cookie. This recipe will be your “Grandma’s recipe” that you make and sell in your business. Print out this recipe. If you are working with a partner, you must EACH have a cookie recipe and they must be distinct! Making generic milk chocolate chip cookies and dark chocolate chip cookies are not distinct! There should be a material difference in your recipes that translate into your costing calculations.
You must consult your recipe to determine the amount of ingredients required for one dozen cookies. You also must consult Exhibit 1 for information regarding the costs of ingredients, manufacturing overhead, and operating expenses. If your cookies have ingredients that are not included in Exhibit 1, these ingredients are considered part of overhead.
2. Calculate the following (in Excel):
a. Total variable costs per dozen cookies
b. Sales price per dozen cookies.
c. Contribution margin per dozen cookies.
d. Cost equation for the cookie recipe using the high-low method.
e. Breakeven point for the quarter (three months) in dollars and in units.
f. Be sure to use formulas, cell references, and proper formatting. All data should be labeled and work should flow logically to be able to be followed by someone not involved in the creation of the document. Remember, you are submitting this to the bank for a loan!
g. If you are working with a partner, you must do these calculations for each cookie recipe.
3. Prepare a friendly but professional email addressed to your professor. This should NOT be emailed; it should be completed in WORD, but drafted like an email. In this email, you should reply to the following questions:
a. Exhibit 1 presents your expenses in the categories of raw materials, manufacturing overhead, and operating expenses. What factors make each of the categories different? In other words, what were your criteria for placing a cost in a particular category?
b. Exhibit 1 indicates which costs are fixed and which costs are variable. For each expense listed, indicate why it would be categorized as fixed or variable.
4. Turn in the complete assignment to the link in Blackboard.
a. If you are working with a partner, you only need to submit it under one person’s name, but both names should be included on the documents submitted.
Note: Make sure you turn in a copy of your recipe with your calculations and answers to the short answer questions.
Responses to the short answer questions must be typed (no hand written responses).
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