Sensitivity analysis, changing budget assumptions, and Kaizen approach. Two brands of chocolate chip cookies, Chippo and Choco, each using two ingredients, are produced by the Choco Chips Confectionary Company. The two ingredients input are chocolate chips and cookie dough. Chippo is 50% chips and 50% dough, whereas Choco is 25% chips and 75% dough. Choco Chips's master budget projects sales of 600,000 packages of each product in 2010. According to the master budget, estimated selling prices are $3.60 per package for each product. A finished product of either brand weighs one kilogram. Forecasted 2010 ingredi- ents costs are as follows: one kilogram of chocolate will cost $2.40, and one 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 2010. (Note to students: sensitivity analysis lends itself very easily to computer analysis with the changing of one or more variables being easily evaluated.)

REQUIRED 1. Use the preceding information to calculate Choco Chips’s budgeted gross margins for 2010.
2. By working with suppliers, Choco Chips was able to reduce the purchase cost of ingredients by 3%. Calculate Choco Chips’s revised gross margin for 2010.
3. Assume that in addition to the 3% reduction in the purchase cost of ingredients mentioned 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 original 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 improvement. Compute Choco Chips’s revised gross margin for 2010 under these assumptions.LO1