A Big Opportunity for Questrom Bakeries

This morning you received a very curious email from the purchasing department at Walmart.They have asked Questrom Bakeries to submit a quote to be the single supplier of their new crinkle cookie product line.The crinkle cookie product line consists of two related products, classic crinkle cookies, and new double stuffed crinkle cookies. This new take on the classic crinkle cookie features a classic crinkle exterior filled with a heavenly mix of whipped cream and Nutella.The request states Walmart expects this cookie line to see unprecedented growth in the private label cookie market over the next 5 years.

If Questrom Bakeries won this bid, they would become the global supplier of a new innovative private label product line that would be sold at over 10,000 retail locations globally by the largest brick and mortar retailer in the world.Suddenly you realize Questrom Bakeries must win this bid.But how much should we bid?What will it cost us to produce these cookies?How much profit do we need to include in our bid to make it worth our time and effort to produce them?

Immediately you send Greg and Janelle off to collect some information.Your question for Janelle is: how would we manufacture these products?The traditional crinkle cookie seems easy enough to automate just as Questrom Bakeries does with so many of its other products.However, injecting the gooey filling without breaking the cookie shell would be a new process for Questrom Bakeries and it isn't immediately clear if that could be automated.

Your task for Greg is to try to estimate what the cost of the product might be.Greg reminds you that the cost is a function of the process, and until the process is figured out, the best we can do is to estimate the materials cost of the product, but that would be a start.You share the recipe included in the request for proposal with Greg and he heads off to make a bill-of-materials while he awaits routing information from Janelle.

After a couple of days Janelle confirms the injection process will have to be done manually.You could automate the process, but the defect rate would be unacceptably high, so her guidance is to best figure out how to automate the cookie exterior and manually inject the filling after mixing the whipped cream and hazelnut spread in a separate process on a mixing line.

These cookies would all be made in your brand new, state-of-the-art production facility in Hoboken, New Jersey.Winning this bid would be perfect for the capacity utilization of the nearly completed facility.You could dedicate the new facility to supplying Walmart with these new cookies and not be distracted by any other production activities in that facility.

Janelle confirms the routings she had been working on.She is quite confident that each basic crinkle cookie will take .001 hours of direct labor, and half that amount of machine time to process, and stuffing the cookies will add .003 hours of direct labor per cookie.

Greg shares some information with you regarding the estimated product cost of the two items.He assures you that based on Janelle's routing information estimating the direct labor costs will be pretty easy.He also explains that based on the bill of materials the direct material costs will also be straight-forward.However, he also explains that allocating the overhead costs will not be so easy.There is a choice to be made that could have a big impact on perceived product costs.

Questrom Bakeries has historically used direct labor hours to allocate shared overhead costs to products.But this time, Greg is concerned about that approach.He feels that using direct labor hours as an activity driver could cause cost distortion across the products and he promises to explain that to you when you meet in person on Wednesday.But for now, he reminds you that a good activity driver is one that is related to the consumption of the overhead costs, is easily measured, and can serve as a link in allocating untraceable overhead costs and finished units of production.He has asked you to think about potential activity drivers that could be used in place of direct labor hours that might minimize the distortion of the costs across product lines. His list of possibilities includes direct labor hours, machine hours, units of production, and any other drivers or combination of drivers you think might be related to the consumption of overhead that would be easy enough to measure and track.

related to the consumption of overhead that would be easy enough to measure and track. Crinkle Stuffed Cookies Cookies Total Estimated Annual Production 10,000,000 2,000,000 12,000,000 Estimated Machine Hours 5,000 1,000 6,000 Estimated Direct Labor Hours 10,000 8,000 18,000 Total plant-wide estimated overhead costs associated with labor 1,000,000 Total plant-wide estimated overhead costs associated with maintenance and facilities 500,000 Total estimated overhad costs 1,500,000 Estimated direct material costs per unit $0.06 $0.09 Estimated total direct labor cost (at $12/hour) 120,000 96,000 216,000 D(Ctrl) *