1. What is the contribution margin/unit for chocolate cupcakes?

2. What is the contribution margin/unit for homemade cookies?

3. What is the contribution margin/unit for hand-decorated cookies (stock)?

4. What is the contribution margin/unit for hand-decorated cookies (custom)?

5. What is the contribution margin/unit for a cupcake cookie topper?

6. What is the contribution margin percent for chocolate cupcakes?

7. What is the contribution margin percent for a cupcake cookie topper?

8. What is the contribution margin/hour for chocolate cupcakes?

9. What is the contribution margin/hour for homemade cookies?

10. What is the contribution margin/hour for a cupcake cookie topper?

Sweet Celebrations: A Managerial Accounting Case Study Wendy L. Schultz Asper School of Business University of Manitoba 181 Freedman Crescent Winnipeg, MB R3T 5V4 Wendy.Schultz@umanitoba.ca September 5, 2017 This case has benefited from feedback received from Darren Henderson, Norman Sheehan, and participants at the Accounting Perspectives Case-writing Roundtables. 1 Sweet Celebrations: A Managerial Accounting Case Study1 Introduction Sweet Celebrations is a boutique bakery located in Winnipeg, MB. The bakery was established by Kayla and Laurie, and the business has grown rapidly since opening their first storefront in 2008. It is now June 2015, and while the business has grown and sales have increased annually, the bakery is not profitable. You, CPA, are an accountant with Henderson LLP, which has been engaged by Kayla and Laurie in order to investigate why their seemingly successful business is not profitable. Background Kayla and Laurie met at a playgroup when their children were young. Laurie had a passion for baking and Kayla had a passion for design. They began baking and selling hand-decorated cookies to friends and other people at playgroup, and soon decided to expand the scope of their business. Fortunately, Kayla knew someone who owned a bakery, and Kayla and Laurie were able to use their commercial kitchen at no cost. Thus, they had no overhead, and only needed to provide ingredients and their time. They began selling their cookies at craft sales in 2003, and were extremely successful. Over the next 5 years, they continued to bake out of their friend's bakery and expanded into online sales across Canada. In 2008, they opened their first storefront, expanded their product line, and made the decision to open as a 100% nut free bakery. Being nut-free really set their bakery apart, and at the beginning, customers were very emotional, some crying in happiness that they could go somewhere and purchase baking for their children with nut allergies that was safe. The business grew rapidly. Within a year and a half, they had doubled their square footage. However, Kayla and Laurie experienced several challenges at the original location. There was no parking, and customers found it difficult to get to the store. Many of their customers were moms with strollers, so even once inside the store, it was hard to manoeuvre around with a stroller. Thus, Kayla and 1 This case study is based on an actual organization. However, pseudonyms have been used to conceal the company name and the name of the owners. 2 Laurie began looking for their next location, and in 2011 moved to a new, larger, location. Over the next four years, the business grew and sales increased annually. By 2015, their customer base included families with allergies, schools, weddings, and corporate and wholesale clients. Their product lines had also grown, and now included the original hand-decorated cookies, cupcakes, cookie cakes, homemade cookies, wedding cakes, a line of vegan products, and an assortment of other cakes. They had also diversified the business and offered decorating classes, birthday parties, and a larger variety of merchandise for sale. The bakers and decorators were always busy, and at one point in 2015, they had to stop accepting new orders as they could not accommodate them. While pleased with the year-over-year increase in sales revenue, Kayla and Laurie were concerned that the business was not generating a profit. On the contrary, the business had generated a net loss in each year since moving to the new location. Kayla and Laurie decide to schedule a meeting with their accountant in order to investigate why their seemingly successful business was not profitable. Laurie: \"Thank you for meeting with us today. As I mentioned when we spoke on the phone, we are very concerned about the profitability - or should I say, lack of profitability - of our business. It just doesn't make sense to us. We are busy, and our revenues are growing each year. How can we be losing money?\" CPA: \"Prior to our meeting, I had a chance to look at your website. You have an extensive product line - very diversified. I am interested to learn more about the revenues and costs for each of the products. Have you calculated the costs to produce each of your products?\" Laurie: \"I hoped that you wouldn't ask me that... Not really. We are so busy with filling orders and running the bakery, that there is little time left for product costing. Honestly, product costing is overwhelming with all of the different products. I do have some notes here with cost information for our cupcakes. The ingredient costs are pretty stable. Our labour costs have increased, however, as we have had to pay more to our skilled decorators.\" CPA: \"And have you increased your prices to offset these cost increases?\" 3 Laurie: \"A little bit. We sell the cupcakes for $2.75. Our hand-decorated cookies are larger now, and they range in price from $5.00 to $7.50. We always have something seasonal in the front of the store. These cookies are made in large batches, and sell for $5.00. These are still a lot of work, but relatively fast to decorate as we make hundreds at a time, and Kayla and I decorate them ourselves. We also sell custom hand-decorated cookies. The minimum order size for these is 12 units, and the prices range from $6.00 to $7.50, depending on the size of the cookie and the complexity of the design. The custom hand-decorated cookies take three times as long to decorate as compared to the stock cookies. I have brought photos of our hand-decorated cookies and cupcakes for your reference.\" [Insert Exhibit 1 here] CPA: \"Wow - these look amazing! And what about your other products? Do you have a list of all of the available products and prices?\" Laurie: \"Yes, I do. All of the information for the main products that we sell is in this document.\" [Insert Exhibit 2 here] CPA: \"There is certainly a wide range of products! If you haven't calculated the cost to make all of these items, how have you determined your prices?\" Kayla: \"We set prices based on the prices of other products that we sell. Some of the prices are also market-driven, and are based on the prices of competitors' offerings. We are also mindful of what we think clients would pay for a particular product.\" CPA: \"Hmmm... That's a problem. Without knowing the costs of making your products, you have no idea whether the price you are charging is recovering your costs, or generating any profit. You could be selling something right now that is actually losing money for your business.\" Laurie: \"That's terrible! We are working so hard all of the time. It's hard to imagine that our work isn't generating profit.\" CPA: \"Do you know what percentage of customers are purchasing from you due to allergies?\" Kayla: \"Maybe half? I really don't know. And of course, these are just the customers who are telling us about the allergy. At the beginning, everyone talked about it because they were just so happy to 4 be able to purchase safe baking for their children with nut allergies. But many of our customers don't have allergies. We just filled a $400 order for a third birthday - cake and hand-decorated cookies. No allergy. And that customer orders all the time. We have a reputation for having good quality and a good product. You can't get this elsewhere in the city. Our customers want the best of the best and they are willing to pay for it.\" CPA: \"I'm going to need you to collect some data on the ingredient and labour costs for all of your products and send it to me. In the meantime, let's talk about some of the products, so that I can understand the steps involved in the production process. Let's start with cupcakes.\" Laurie: \"As I mentioned, we sell the cupcakes for $2.75. This is a standard cupcake with icing and sprinkles on top. We also offer the option to add a small custom hand-decorated cookie on top of each cupcake for $0.80.\" CPA: \"Wait a minute - a small custom hand-decorated cookie on top of a cupcake only costs $0.80? But don't you sell custom hand-decorated cookies for $6.00 to $7.50, depending on the size of the cookie and the complexity of the design? Are the small custom hand-decorated cookies that much quicker to produce?\" Laurie: \"No, not at all. The process is still the same - we still have to mix the cookie dough, cut the cookies, mix the icing, prepare the icing bags, and decorate the cookies. I guess that the ingredient costs would be slightly less as the cookies are smaller. But the labour cost is basically the same.\" CPA: \"I see. What about your cookie cakes? Tell me about that product.\" Kayla: \"A cookie cake is a round or slab cake with small border cookies (e.g., #5 for a fifth birthday), with an additional large custom cookie. Prices for these range from $39 for an 8\" round cake to $79 for a full slab cake. A mini slab cake sells for $59, and has 14 border cookies. However, we also offer the option to upgrade 7 of the 14 border cookies to custom hand-decorated cookies for a flat rate of $10. We have an extremely creative decorator who has fantastic precision and amazing attention to detail. The custom cookies that she makes are amazing!\" 5 CPA: \"More customization! How much longer does it take this decorator to make these 7 amazing custom cookies compared to the standard number cookies? And what is her hourly rate of pay?\" Laurie: \"Hmmm... I'm not really sure. We pay her $14.50/hour, but we don't keep track of time that way. I would say that it takes her 45 minutes to do the hand-decorated cookies on an 8\" cookie cake. It would take longer to do the custom cookies as there are so many steps involved. There is the base layer of icing, and depending on the design, there could be four different colours of piping. The process is very time consuming, as there is a lot of stopping and starting. The cookies are baked, trayed, the base layer is applied, then they are trayed again. And then they are touched up to 4 more times before they even get on the cake.\" CPA: \"As soon as you touch something, it is costing you money. How many of these touches can you recover from the customer? A fixed-price point for all of the customized work may not be a good pricing strategy.\" Kayla: \"We set the company up to be a hand-decorated cookie company, and it's the customization that sets us apart. But the labour costs are killing us!\" CPA: \"What products do you sell that are less customized? You should be making a higher contribution margin on these products.\" Laurie: \"The homemade cookies are doing really well. Our competitors use mixes and fillers, but we don't. All of our cakes and cookies are baked from scratch, so it is just like home baking. The homemade cookies are fast and easy to make. We sell 6 for $5.50 or 24 for $20; most people buy 24 cookies. We also sell these cookies wholesale to schools for $0.79/cookie. We have at least 12 schools that order homemade cookies every month, and each school orders 10-12 dozen cookies.\" CPA: \"Do you have information on the costs to produce the homemade cookies?\" Laurie: \"No, but I can get it for you. We can get the bakers to keep track of their time to make each product. I will calculate the ingredient costs and send you the information.\" [Insert Exhibit 3 here] 6 CPA: \"Thanks. Finally, tell me about your wedding cakes. The price point for these is so much higher than your other products. Do they take a lot more time to make?\" Laurie: \"Not at all. We sell a three-tier wedding cake decorated with textured buttercream icing for $345. Aside from the time that it takes to stack and level the wedding cakes, I don't think that a wedding cake takes much more ingredients or time than a birthday cake. We can make a three-tier wedding cake in about 90 minutes.\" CPA: \"A birthday cake that you sell for $59? The price of a three-tier wedding cake is $345! If the ingredient and labour costs really are comparable, you are making almost six times more contribution margin/hour on wedding cakes as compared to birthday cakes! If you want to maximize your profit, you should be selling more wedding cakes!\" Kayla: \"That's a great idea in theory. However, the wedding cake orders are seasonal. Our wedding cake orders doubled last year, but I think that we only had 78 orders. We make birthday cakes all year long.\" CPA: \"That's a good point. I think that I have gotten enough background information on your products to do the required analysis. Once I have received the missing information from you on product costs, we will get started. Are there any other issues that you would like help with?\" Kayla: \"I've got so many ideas for where I would like to take the business, but there don't seem to be enough hours in the day to get everything done. Time is a real constraint for us. Laurie and I are still so involved in the day to day operations of the business. It feels like we don't have enough time to work on the things, like product costing, that are important if we want to grow the business.\" CPA: \"That's certainly not a good situation to be in. We'll include some recommendations for you in our report.\" 7 Exhibit 1: Select Product Images Hand-decorated cookie (stock) Hand-decorated cookie (custom) Cupcake (standard) Cupcake (custom) 8 Exhibit 2: Select Products and Pricing Item Cookies Hand-decorated cookie (stock) Hand-decorated cookie (custom) Additional Information Made in large batches; seasonal theme Minimum order size is 12; price varies, depending on the size of the cookie and the complexity of the design Homemade cookies (retail) Cakes Mini Slab Cookie cake (standard) Mini Slab Cookie cake (customized) Wedding cakes 8\" Cloud 9 cake Brownie bottom cheesecake $5.00 $6.00-7.50 6 for $5.50 24 for $20.00 $0.79 each Homemade cookies (schools) Cupcakes Cupcake (standard) Cupcake (custom) Price With icing and sprinkles on top With icing and hand-decorated cookie on top Hand drawn designs on slab cake. 1 custom cookie + 14 border cookies Hand drawn designs on slab cake. 1 custom cookie + 7 of 14 border cookies are customized Three-tier cake decorated with textured buttercream icing 10 layers of chocolate chip cookies and whipping cream Baked brownie base with cream cheese, berries, and whipped cream topping. 9 $2.75 $2.75 + $0.80 $59 $59 + $10 for custom hand decorated cookies $345 $34 $29 Exhibit 3: Product Costing The bakery's products are produced from scratch in batches. Ingredient costs include cupcake batter and cookie dough, and icing for decoration. The baked goods are then packaged for sale. Hand-decorated cookies are packaged in individual bags, tied with a ribbon and also include a Sweet Celebrations logo sticker. The minimum order size for custom hand-decorated cookies is 12 units, and prices range from $6.00 to $7.50, depending on the size of the cookie and the complexity of the design. Per unit selling price and detailed costing information for each product are provided below: Hand-Decorated Cookies Per unit Revenue $5.00 Ingredient costs Cookie dough Icing Total ingredient costs Packaging bag + ribbon + sticker Per unit Custom Per batch of 12 $6.00 $11.25 4.75 $16.00 Labour per batch (minutes) Mix cookie dough Cut cookies Make icing Package cookies Total labour - baking/icing prep/packaging (minutes) Decorate stock cookies Decorate custom cookies Total labour (minutes) Hourly rate for bakers/packagers Hourly rate for decorators2 Stock Per batch of 100 15 45 45 50 155 167 60 322 $14.50 0.00 $14.50 0.00 $0.20 $0.20 2 Kayla and Laurie decorate the stock and custom hand-decorated cookies themselves; thus, they do not have to pay the decorators to do this work. However, they would like to move away from the day-to-day operations of the bakery and will need to delegate this work to the decorators in the future. 10 Homemade cookies are packaged in bags of six, tied with twine and also include a Sweet Celebrations logo sticker. A bag of 6 cookies sells for $5.50, and 4 bags of 6 sell for $20. Most people buy 4 bags (24 cookies). These cookies are also sold wholesale to schools for $0.79/cookie. Homemade Cookies Per unit Revenue If sold for 6/$5.50 If sold for 24/$20.00 Wholesale $0.92 0.83 0.79 Ingredient costs Cookie dough Total ingredient costs $19.72 $19.72 Labour per batch (minutes) Mix cookie dough Roll and weigh cookies Package cookies Total labour (minutes) Hourly rate for bakers/packagers Packaging \"6\" bag + twine + sticker Per batch of 162 15 30 20 65 $14.50 $0.15 11 Cupcakes are available in a variety of flavours, including chocolate, vanilla, cookies n' cream, and red velvet. Standard cupcakes with icing and sprinkles on top sell for $2.75. Customers also have the option to add a small custom hand-decorated cookie on top of each cupcake for $0.80 (minimum order size is 12 cookies per design). Cupcakes are packaged in boxes of 6 and include a box liner and Sweet Celebrations logo sticker. Chocolate Cupcakes (with cookie topper)3 Per unit Revenue Ingredient costs Cupcake batter/cookie dough Icing Total ingredient costs Labour per batch (minutes) Mix cupcake batter/cookie dough Scoop cupcakes/cut cookies Make icing Decorate cupcakes/cookies Package cupcakes Total labour (minutes) Hourly rate for bakers/decorators Packaging "6" box + sticker + liner Cupcakes Per batch of 108 $2.75 $297.00 $0.32 $ 15.69 19.30 $ 34.99 15 20 30 30 18 113 Per unit Cookie Topper Per batch of 108 $0.80 $86.40 $0.04 $ 3.24 1.08 $4.32 15 30 30 234 309 $14.50 $0.65 3 Ingredient costs fluctuate depending on the flavour of cupcake. For example, the nut-free cocoa powder is made in Denmark and is very expensive. Thus, the contribution margin will vary, depending on the flavour of cupcake analyzed. However, the costing information for all flavours is not significantly different from the information presented above. 12