HOW DO IT FIND THE BREAK EVEN NUMBER OF UNITS? I KNOW THE ANSWER IS 2400 UNITS BUT NOT SURE HOW THEY GOT IT.

You knew they were good, but you never thought Grandmas oldcookie recipe would bring you this far! It all started about three years agowhen you began using your Grandmas cookie recipe to bake, what most peopleconsider, the sweetest, yummiest cookies they have ever put in their mouth.After finishing college, you started baking cookies as a little side business.You bake them right in your home and sell them to friends and local stores.Response has been great! People love the cookies, and you are making a littleextra money.

There is a small problem with all of this success. Thevolume of business has grown so much that you can no longer keep up withdemand. Your desire to grow this hobby into a full-fledged business has led youto explore expanding. You have been investigating new facilities and equipment,and checking into the requirements of hiring a few employees. However, youremissing one important element; money to fund this expansion!

On the advice of a friend, you meet with a local banker. Shesays that the bank cannot lend you any money without a business plan thatdescribes your financial results, marketing strategy, and projections for thefuture. You show the banker your income statement and balance sheet as of themost recent year-end. Looks very promising, she states. But what I reallyneed to see is what you plan to do with the money that I will lend you and whatyour business will look like next year.

When you return home after the meeting, you pull out yourold college accounting textbook. You realize that this is a master budgetproblem just like you did in college. After reviewing your class notes andreading the textbook, you settle in to produce a plan for next year.

ASSIGNMENT PART 1

You immediately realize that you must gain an understandingof your cost structure and of the relationship between your revenues, costs,and profits. You pull out Grandmas recipe to see what ingredients it takes tomake a dozen cookies. Next, you go to your invoice files to determine the costof each of the ingredients. You brainstorm to develop a list of the new coststhat you must incur when you expand your operations. After analyzing all ofthis data you are able to break out your costs into several categories. Yourealize that some costs are for raw materials while others are related tomanufacturing overhead or operating expenses. You also realize that some costsappear to be fixed while other costs are variable. Now you have sufficient informationto determine how much money you can make when you sell these cookies.

Requirements for Part1:

1.) Consultthe recipe listed on the last page of this handout to determine the amount ofingredients required for one dozen cookies. You must also consult Exhibit 1 forinformation regarding the costs of ingredients, manufacturing overhead, andoperating expenses.

2.) Calculatethe following:

a. Totalvariable costs per dozen cookies.

b. Contributionmargin per dozen cookies.

c. Breakevenpoint for the quarter (3 months) in dollars and in units.

ASSIGNMENT PART 2

You now have the information you need to create a budgetthat will allow you to show the banker your plans for the coming year. Thisbudget will also help you to understand your sales and the collection on thosesales. You will be able to determine how much money you need to purchase theingredients for your cookies and to pay your overhead and operating expenses.You realize that if you can estimate how many dozens of cookies you can sell,then you can calculate how many ingredients to buy and how much overhead andoperating expenses will be. You need to get your sales estimate as accurate aspossible.

Requirements for Part2:

Exhibit 2 presents information regarding your salesprojections, expected collection patterns, purchasing and payment patterns forthe first four months of the year. Exhibit 3 contains information regardingyour plans for capital contributions, equipment purchases, loans, and minimumcash balance.

1.) Preparethe following operating budgets for the first quarter:

a. Salesbudget

b. Cashcollections budget

c. Directmaterials purchases budget

d. Cashdisbursements budget

e. Manufacturingoverhead budget

f.Operating expenses budget (SG&A budget)

g. Cashbudget

2.) Shortanswer questions:

a. Discussthe importance of beginning the master budget process with an accurate salesbudget.

b. Whatare the major benefits of budgeting?

EXHIBIT 1

Sales Price, Costs ofIngredients, Manufacturing Overhead, and Operating Expenses

Sales Price:

A dozen cookies sell for $12.05.

Cost of Raw Materials:
Direct Materials	Unit Cost
Flour/Sugar (any kind) per cup	$0.15
Eggs per egg	$0.10
Shortening per cup	$0.50
Chips/Nuts per cup	$1.25
*Any other ingredients are considered part of manufacturing overhead

Direct Labor Costs:

Information regarding direct labor costs is not maintainedbecause you are your only employee. Labor costs are included as a part ofmanufacturing overhead.

Manufacturing Overhead:
	Variable costs (per dozen):	Fixed costs (per month):
Utilities	$0.50
Other indirect materials and labor	$0.75
Maintenance		$ 250
Depreciation		$ 500
Totals	$1.25	$ 750

Operating Expenses:
	Variable costs (per dozen):	Fixed costs (per month):
Sales Commission	$0.50
Shipping Costs	$1.00
Salaries		$2,000
Depreciation		$ 200
Other		$1,450
Totals	$1.50	$3,650

EXHIBIT 2

Sales Projections,Collections, Purchases and Payments

Monthly salesprojections (in dozens of cookies):

January 1,000

February 1,200

March 1,300

April 1,100

You have stopped production of cookies at year end tofacilitate the expansion of the business. Therefore, you expect to have nouncollected accounts receivable, unpaid accounts payable, or raw materialsinventories at January 1, the beginning of your budget period.

Collections onSales:

Percentage

Cash sales are collected in the month of sale. 60%

Credit sales are collected in the month following sale. 40%

Production:

The company produces cookies daily. No work-in-process orfinished goods inventories are maintained.

Raw Materials:

The company plans to maintain an ending inventory of rawmaterials at the end of each month equalto 10% of the raw materials production needs for the next month.

Payment for RawMaterials:

Percentage

Paid in the month of purchase 25%

Paid in the month following purchase 75%

EXHIBIT 3

Other Transactions

Initialinvestment:

Capital contribution in January $10,000

Borrowing:

Bank loan in January $25,000

Minimum desired cash balance at the end of month $10,000

If cash over $10,000 is available at the end of themonth, you will make repayments of outstanding loans in multiples of$1,000. If additional borrowing isnecessary to maintain the $10,000 end-of-month balance, you have a line ofcredit with the bank, and will borrow additional funds in multiples of $1,000.Interest (12% annual rate) is paid monthly on total outstanding borrowings atthe end of the prior month.

Fixed AssetAcquisition:

Budgeted fixed asset acquisitions in January $20,000

Sweetums Cookie Recipe (makes 1 dozen cookies)

Ingredients:

1 cup brown sugar

cup sugar

1 cup shortening

2 eggs

1 teaspoons vanilla

2 cups flour

1 teaspoon baking soda

1 teaspoon salt

2 cups chocolate chips