Sensitivity analysis, changing budget assumptions, and kaizen approach. Choco Chips produces two brands of chocolate chip cookies: Chippo and Choco. Choco Chips’s cookies are produced from two ingredients: chocolate chips and cookie dough. Chippo is 50% chips and 50% dough, whereas Choco is 25% chips and 75% dough.

Packages of either brand weigh 1 kilogram. Choco Chips’s master budget projects sales of 600,000 packages of each product in 2008. According to the master budget, estimated selling prices are $3.60 per package for each product. Forecasted 2008 ingredients costs are as follows:

1 kilogram of chocolate will cost $2.40, and 1 kilogram of cookie dough will cost $1.20. A total of 6,000 direct manufacturing labour-hours—2,400 hours for Chippo and 3,600 hours for Choco—are budgeted at the hourly rate of $24 per hour. Indirect manufacturing costs are expected to be $192,000. The indirect manufacturing costs are allocated equally between Chippo and Choco on the basis of packages produced in 2008.

1. Use the preceding information to calculate Choco Chips’s budgeted gross margins for 2008.

2. By working with suppliers, Choco Chips was able to reduce the purchase cost of ingredi¬

ents by 3%. Calculate Choco Chips’s revised gross margin for 2008.

3. Assume that in addition to the 3% reduction in the purchase cost of ingredients men¬

tioned in requirement 2, Choco Chips plans a 1% cost reduction in direct manufacturing labour-hours and a 2% cost reduction in the indirect manufacturing costs from the origi¬

nal data. These revisions to the original budget resulted from an analysis of all activities by a cross-functional team as a part of Choco Chips’s efforts toward continuous improve¬

ment. Compute Choco Chips’s revised gross margin for 2008 under these assumptions.

Excel Application For students who wish to practise their spreadsheet skills, the following is a step-by-step approach to creating an Excel spreadsheet to work this problem.