Aunt Connie??™s Cookies Simulation
January 17th, 2011
Guyton J. Gagliardi, CPA, CIA, CFE
Aunt Connie??™s Cookies is a brand that is synonymous with yummy lemon creme and real mint cookies throughout the east and mid-west. Maria Villanueva, the grandniece of Connie Rochoa, is now the CEO of the family owned business. She has appointed Rita Benchekroun as the Chief Operating Officer, who will be making decisions as to how to maximize the company??™s contribution margin and operating profits.
Aunt Connies??™ Cookies came up to produce a bulk order of 1 million packs of real mint cookies to be completed in one month??™s time. The company needed to decide if completing this order will be a good option. Maria stated that the total contribution margin and operating profit from the lemon creme cookies are less than the real mint cookies. She suggested that the company reduces the current production volume for lemon creme and produce more real mint to accommodate the bulk order. In accepting the bulk order, Maria??™s suggestion should not be followed. To maximize the operating product, it is better to produce more of the lemon creme cookies because it has a greater contribution margin per unit than the real mint. This meant that the current production of real mint cookies should be reduced. The bulk order should not be considered when the cookie production for both types of cookies exceeds production capacity. This would mean that the company is incapable of completing the order. Also, Aunt Cookies should not consider accepting a bulk order if the asking sales price per unit for the order is at a price that would produce results, where the contribution margin is less than the fixed costs. Although the contribution margin may still be greater than zero, it will still produce a loss for the company. Therefore, it would not be worth it to the company to fulfill the order.
The break-even point for manufacturing lemon creme cookies in the newly acquired unit is 564,000 packs. The decision to manufacture 600,000 packs resulted in operating profits from the new unit, which met the exact monthly production target for lemon creme cookies. This has increased overall profits. If the break-even volume of lemon creme cookies is increased to 660,000 packs and continuing to make peanut butter cookies would not have been profitable the organization operation may result in operating profits for the organization operation may result in operating profits. However, doing so forced the existing unit to reduce volumes for lemon creme cookies from their original status of exceeding the monthly production target. Since the variable cost per unit for making lemon creme cookies is higher in the new unit, the decision has led to a reduction in overall profits. The three key learning points from the simulation Rita decided to address are: fixed costs, variable costs, and break-even points. These are all part of the relationship of total costs that are essential expenditures that must be made so as to run a business. Every aspect of production has a cost related with it: labor, fixed assets, and capital for example. All businesses are crucially concerned with determining their costs. Many types of costs are apparent and simply proven. Other types of costs must be estimated or allocated; the relationship between costs of input and units f output may not be directly observable. As a result, there are different ways of classifying costs according to their relationship to output as well as in keeping with the context in which they are used (Costs, 2005, para.1 and 2). There are two basic types of costs incurred by businesses, fixed and variable. Fixed costs don??™t change in total as the volume of activity changes (Marshall, McManus and Viele, 2004, pg. 417). In regards to costs, it is also useful to consider the break-even point. It is usually expressed as the amount of revenues that must be made for the firm to have neither profit nor loss.
Along with keeping fixed costs low, variable costs must be analyzed. After analyzing the contribution margin, Aunt Connie??™s Cookies can have real, concrete evidence in knowing how much money is made from each unit, which are cookies. Determining the break-even point is the way to start.
??? University of Phoenix. (2010). Accounting for managerial decision making [Computer Software]. Retrieved from University of Phoenix, Simulation, ACC561 website.
??? Costs. (2005). Retrieved December 1, 2005, from http://www.referenceforbusiness.com Marshall, D.H., McManus, W.W.& Viele, D.F. (2004). Accounting : What do the numbers mean. New York: McGraw- Hill.