By February 2013, Baklava Done Better LLC was incorporated in the Dubai Emirate with a capitalization of AED 3,000,000. The business flourished for four years. The income statement of the last quarter of 2017 is shown below:

Income Statement for last quarter of 2017
		AED
Sales Revenues		13,840,000.0
minus COGS		11,056,000.0
Gross margin		2,784,000.0
Admin expenses	530,000.0
Shipping expenses	465,300.0
Sales commission (3% of sales)	415,200.0
Financial expenses	44,000.0	1,454,500.0
Net Profit		1,329,500.0

The number of units (containers) sold and sales volume of the three products were as follows:

	AG	AGL	AGSL	Total
Actual sales(units)	30,794	44,288	36,503	111,585
Actual sales (AED)	2,463,520.0	5,536,000.0	5,840,480.0	13,840,000.0

Family Compensation

Bilal - like any good salesperson - was aggressive and incentive oriented. To ensure that all family members would stay motivated and driving the business, Bilal persuaded the family to adopt a compensation scheme based on sales performance. Each family member was to receivea low salary, supplemented by a percentage of the sales he or she makes. The supplemental commission was set at 3% of sales price on every all sales.

i am sorry to inform you that there will be no agave for a while. The authorities estimated that it will be few months before they can fix the roads. I managed to secure a couple of shipments of agave from a friend of mine at the same old price, but it will not be enough to meet our needs for the coming quarter. At most he will be able to provide us with AED 4,350,000 worth of raw agave (direct imported material) for the first quarter of 2018 which is about 50% of our needs, according to Mahmoud's forecast. Given the good relationship we have with our suppliers and the contracts we already we have signed with them, they assured me that there will be no increase of prices of raw agave."

The family was devastated after hearing the news. Bilal recomposed himself and turned to Mahmoud and said:"Ok, my cousin: this is your chance to shine. Walk us through the forecasts you always prepare and show us the impact this is going to have on our operations"Mahmoud quickly projected on the screen the following table:

Profit estimate for the first quarter of 2018
		AED
Forecasted sales		16,800,000.0
minus COGS		13,644,490.0
Gross margin		3,135,510.0
Admin expenses*	610,000.0
Shipping expenses**	532,122.0
Sales commission (3% of sales)	504,000.0
Financial expenses***	44,000.0	1,690,122.0
Budgeted net profit		1,445,388.0

Mahmoud pointed out that in his budget he made the following assumptions/relationships:

1. Admin expenses are fixed and were increased in 2018 to include promotions & salary increases
2. **Shipping costs are mixed, and the total magnitude is a function of the number of units/containers shipped
3. ***Financial expenses are expected to remain the same. No change in the outstanding debt.
4. Costs of labor and overhead were adjusted to include any rates and/or prices increases expected to take place in 2018.

Mahmoud assumed the sales mix of sales dirhams of 2017 is going to apply in 2018. No changes in cost of raw agave or selling prices of the syrups are expected in the 1^st quarter of 2018.

Mahmoud then presented the following production & cost schedule:

Production Schedule and Cost Structure per Product
Amounts in AED	AG	AGL	AGSL
Direct material (agave)	32	60	75
Direct labor and packing	14	22	24
Production overhead*	18	23	28

* Mahmoud has combined both fixed and variable expenses in production overhead. Mahmoud estimated a fixed overhead productions costs of AED 623,070 for the first quarter of 2018. This figure was based on the fixed overheard production costs of the last quarter of 2017 adjusted for inflation and other specific variables. He has then allocated the fixed overhead production costs equally among the number of units/containers expected to be produced & sold of all products.

The company maintains minimum levels of all types of inventory.

Additional processing time & any additional material/agent used for different products are reflected in the variable overhead costs

As the meeting continued, Mahmoud commented that given that the operation the Kachab family run was very lean there would be no place to cut costs. Direct material, packaging, and direct labor would remain the same at least in the short run. Similarly, production overhead will not change; the variable portion will be incurred as production continues, and the fixed portion of overheads is already very optimized.

After a moment of silence, Mahmoud said:"Perhaps we could cut our sales commission". Bilal quickly objected and said:"No. We cannot touch the sales incentive. In these moments of crisis, we need it more. This will keep us motivated and in the right direction not to make a rush decision, like deciding to cut prices. We must continue focusing on the top line."

Mahmoud agreed with Bilal, however he suggested they may need to come up with a limit of sales on each product if they were to keep all customers intact.

Abyr then interjected and reminded the family that the raw agave orders she had secured were not enough to produce all three products simultaneously at the proposed quantities. She then also reminded them that since their three products were being purchased by very different segmented clients, cutting one of them out of supply could mean a permanent loss of a group of clients. Abyr agreed with Mahmoud that BDB needs to keep all customers intact & proposed that all clients bear the shortage of the agave-based syrup. Therefore, she proposed that at least 20,000 units should be produced and sold for each of the three products.

Mahmoud agreed with Abyr's proposal and reminded the family that this decision will come with an opportunity cost. The meeting concluded with Mahmoud taking the task of reworking the forecasts based on these new constraints and determining the opportunity cost of Abyr's proposal.

Your task

Assume the role of Mahmoud as the Business graduate expert in managerial accounting and be prepared to discuss your findings with the BDB shareholders. Answer the following questions:

1. Calculate the break-even point for the first quarter of 2018 assuming that there is no problem with the supply of raw agave and things will go as expected in the budget. Calculate the breakeven point again assuming the shortage of supply. Assume the limited available raw agave will be distributed as Abyr suggested. Do you expect the breakeven point to change? Why? Show you computations.
2. Based on the given constraints (limited supply of raw agave), prepare a revised production schedule that maximizes profit for BDB. Ensure you prepare a contribution margin format income statement that supports your recommended production schedule.
3. Since BDB members decided that every product of the three products BDB sells will have a minimum production of 20,000 units, is there any opportunity cost for BDB? In other words, how much profit is BDB foregoing, if any, with the decision of serving all three group of customers in the way Abyr suggested?
4. In the following quarter, assuming the supply will be abundant, and production may be increased to compensate for the loss of the 1^st quarter, how much sales BDB needs to make to achieve a target profit of 1, 680,000 AED. Assume the sales mix of last year.