Adelle Watson owns a small manufacturing company, Easy Bake, which makes one product, a ceramic pie plate that features even heating that helps prevent pie shells from getting burnt in patches. It is one of the products carried by most high-end kitchen stores throughout the United States. Even though she sells every thing she makes in a month, the product is not selling fast enough to generate a steady profit for Adelle. She has decided to hire you for $1,000 a month for three months to do a complete analysis of her business. The first person you talk to is Joey Blake, the company accountant. He provides you with the following information for March:

• Sales: 5,000 units

• Total cost of production: $23,900

• Average cost of production: $4.78

• Average price: $5.00

When you ask Joey for more information on the costs of the company, you find out that all he has been doing is taking the total costs and dividing it by units made to get his cost numbers. You know there is a better way to do this, so you ask Joey to let you look at the books. He does so, providing you with the following information:

After completing some basic analysis, you suggest to Adelle that she drop her price by 10% to increase demand. You also make some suggestions about variable costs and fixed costs. Adelle is nervous, but she goes along with your suggestions. It takes a month to make all of the changes you recommend. Before your salary is added, Joey gives you the following results for April and May :

It seems like you have had an impact. The company is now selling its product at $4.50, which is resulting in a rapid rise in sales. You want to have some specifics for Adelle, however, so now you are going to do some analysis and then write a memo.

REQUIRED:

a. Analyze the data Joey originally gave you for March, coming up with the cost formula and breakeven sales in units and dollars.

b. Using the data from April and May, recalculate your cost formulas. Do not forget to add $1,000 to the fixed costs each month to cover your salary!

c. What is Adelle’s breakeven point now?

d. You decide your job is done, so you give Adelle your notice. This makes her a bit worried, but you console her with the fact that her fixed costs will drop back to the previous $11,400. Recalculate Adelle’s breakeven point without your salary.

e. What is Adelle’s margin of safety in units and revenue dollars in April and May?

f. Draft a memo to Adelle with the results of your analysis, including percentage change figures where logical. Use a business case structure that details each of the alternatives and results you attained.

Transcribed Image Text:

Easy Bake's Costs for Varying Volumes Volume Sold Muterids Direct labor Supplies Indired Labor Bectricity Depreciation Other Overhead Rent 5,000 $6,250.00 $2,500.00 $750.00 $3,000.00 $1,500.00 $2,900.00 $3,500.00 $3,500.00 4,000 $5,000.00 $2,000.00 $600.00 $2,900.00 $1,300.00 $2,900.00 $3,200.00 $3,500.00 3,000 $3,750.00 $1,500.00 $450.00 $2,800.00 $1,100.00 $2,900.00 $2,900.00 $3,500.00