Is Humble Pies making a Profit?Why and How?

Adopted hum AICPA Accounting competition Mariam Accounting All characters and company information and names in this case aacvment are ctitious Any resemblance to real persons, IIving or dead, or companies is purely coincidental Stage One A hlstory of Humble Pies Humble Pies, Inc is the genius of childhood neighbors and best friends Linda Jackson and Taylor Johnson. Though almost inseparable through high school, the two parted ways after graduationLinda heading abroad to study the art of pasty making in some of the most elite patisseries in Paris, and Taylor pursuing his love of food (especially bacon) by landing jobs in some of the nest restaurants in their hometown of Charlotte, N.C. A chance encounter back in 2005 reunited the two and got them talking oftheir mutual love of food and what they'd been learning. Soon they were spending their free time crafting quirky but sophisticated (not to mention delicious) piespassing them out to friends and family, and building a grassroots fan base around town. When the operation outgrew the Jackson family kitchen, Linda and Taylor applied for a small business loan. With it, they boughta small pie factory in Charlotte and became the proud owners of a 60,000 sq uare-foot facility where they now produce high-quality pies. A couple years ago, as demand for the pies grew to a national market (thanks to the compaan lnstagram account), the co-owners hired a new Controller, a CPA with her Chartered Global Management Accountant ice MA) designation from their CPA firm to help them continue to grow and stay protable. Now they just landed their largest grocery store yet. In 2013, the company had $6.1 million in sales revenue and is on track to do 593 mllllon thls yeart Humble Pies uses natural and organic ingredients, and combines Linda's Parisian techniques with Taylocs unexpected takes on classical southern desserts like Bacon Chocolate Chess, Avocado Key Lime and Chai Apple Pie. It offers three main product lines: Singles, as the name suggests, are a single serving, ready to eat on a plate. 9-inch pies are prersliced and sold to distributors for food service applications or grocery in-store bakery cases. 10-inch pies are packed in strong, clear plastic domes to be sold in refrigerated cases and with custom labels. The pies are available as a variety pack, a duo-pack ltwo different avors) or a full pie, Linda and Taylor love getting feed back from their fans and are always testing new recipes based on suggestions or grocer suppliers' needs. They often receive requests from food chains for different types and sites of pies, and must decide which ones to accept and which ones to pass on. Ple production Naturally, Linda and Taylor can't reveal their recipes, but they have provided some details on how the pies are made Most pies go through a general four-step process: mixing, lling, baking and packaging Humble Pies makes ve different crusts mixed in large batches, and llings are produced in smaller batches depending on the production schedule. Next, crusts are filled with, well, the lling and placed on trays for Page 1 baking 115 to 25 at a time depending on size). After theyve cooled for an hour, pies are decorated, sliced, packaged and labeled and placed on pallets to freeze until shipped. It takes about a week to complete a pie product order and the plant uses just-i time production methods. The goal is to produce a pie every ve seconds. Since contaminated food would lead to a visit by the Health Department (and possibly shutting down the factory), there are at least three sanitation workers on duty at all times. Generally, there are 3-4 warehouse workers on duty to handle the shlpplng, receiving and storage of raw materials and finished product The plant typically runs two shifts per day with two production supervisors assigned to each shift. For each of the three product lines, the process is virtually the same regardless of the flavors or ingredients. But the processes between the product lines can be very different (e.g., packaging for variety packs takes much longer than for whole pies because workers need to pull different avor slices and place them on the same tray). Not to mention the packaging variessome go in boxes while others go in plastic containers, and some package tops and labels take longer to place than others. Humble Pies seldom places its own labels and logo on any of their products. Label designs generally come from the customer, so they vary based on each order. The plant currently has capacity to do $1 million in sales per month, but with additional investments in ovens, mixers and workstations (for about $500,000) it could increase to $1.5 million. October through December tends to be a higher volume period (with increased demand for holidays like Thanksgiving and New Veal's), resulting in Humble Pies getting roughly 60% of its business during that time period. Because of the rush, the plant runs overtime and weekend shifts as needed to get the product to its suppliers The owners believe the labeling process signicantly slows down production time, Reports Humble Pies' managers rely heavily on a \"Labor Report\" to manage its work force. The report lists eight salaried workers and approximately so hourly employees, expected number of work days for the month, hours per day (typically 8) and total projected hours for the month. The hours are multiplied by the employee pay rate (from 5850-51250 per hour) to get expected monthly gross pay amount for each hourly employee based on a 40-hour workweek. The sum of all expected hourly employee gross monthly pay amounts are added to the salaried production workers gross monthly pay and the projected total payroll added costs (Employer taxes, Social Security, etc) to get "total labor dollars\" cost for the month. The total labor dollars are divided by projected sales revenues to get a \"projected labor percentage.\" Management watches this number pretty closely and tries to keep it around 20% of sales, In the past, it was assumed that labor costs for the company did not change with sales volume, and some months were profitable and some were not. Currently, Humble Pies' managers adjust labor hours up or down depending on the demand for pies and try to keep the projected labor near 20% of sales. Costlng Issues Linda and Taylor are skilled at determining the cost of ingredients, but when it comes to labor and the overhead of each product line, theVre not sure where to start, At the moment, Humble Pies allocates the same amount of overhead costs to every output unit while total labor averages 20%, they believe that labor and overhead costs vary greatly by product. And, since the company does not currently track labor hours by product, Linda and Taylor have no idea of labor cost or protability by product line A digital biometric time clock keeps track of hours for the employees, but management is open to asking shift Page 2 workers to track their hours by job or batch. Taylor and Linda's primary concern is making sure there is a good reason to change the method and that there's a simple and low-cost way to track it, The company has a small but growing administrative staff that can do some basic record keeping while the Controller manages nancial reporting, taxes and decision analysis, a skill she developed while working toward her CGMA designation. The Controller has asked for help determining a product costing system Humble Pies can use for pricing decisions, product line protability analysis, financial planning and helping managers understand the business. But costs are only one component, The company currently bases pricing decisions on the \"three C's": cost, consumer and competition. As a bare minimum, the company wants to achieve a target 17% gross profit margin (or higher) on cost, but Linda and Taylor consider what a consumer is willing to pay the most important factor in pricing. They want to be sure to keep Humble Pies competitive with other companies. Table 1 provides selected actual cost and revenue data for May 2014. Additional information about costs can be found in the Notes to Selected Financial Data below. Table 1: Selected Flnanclal Data (actual cost and revenue data for May 2014) Cost category Behavior May 2014 Sales $766,667 Expenses: Raw Materials Variable $327,934 Bakery labor Mixed $153,757 Administration Salaries Fixed $41,367 Supplies Variable $3,333 Freight & shipping-in Variable $0,907 Freight & ShippingOut Variable $64,707 Utilities Electricity Variable $9,313 Utilities Gas (ovens) Variable $3,067 Water Variable $920 Repairs 3. Malntenanoe Fixed $4,293 Rent expense Fixed $19,167 Telephone & Internet Fixed $2,300 Co-owners' salary Fixed $25,300 Brokers' commissions Variable $30 667 Total Expenses $697 042 Operating Prot $65,625 Income Tax 521 20 Net operating Income $47,345 Unit volume 64,500 Average Operating Assets $5,500,000 Minimum Rate of Return 8.00% Notes to Selected Financial Data Raw Materials: Includes main ingredients and flavor additives. Main ingredients are relatively higher cost Items such as our, sugar, eggs, nuts and fruit that appear on the package label. Flavor additives are relatively low-dollar cost items and a small part of the weight of the pie such as spices, dyes, salt, and certain oils that don't always appear on the package label. Bakery labor: The cost amount consists of 22% supervisory salaries and taxes and the rest hourly workers, Bakery labor workers are organized into four categorie , production line (mixing, lling and baking), packaging, sanitation and warehouse {all included as part of cost of goods sold). Administration Salaries: Includes taxes and benefits for the Vice President of Operations, the Controller, Human Resources Manager and two administrative support people. Supplies: Includes supplies relating to production, packaging and decorating, sanitation and warehouse (think: adhesive, pastry bags, spatulas, scrapers, Icing pens, gloves and so on). Freight Ra Shipping-In: The costs of shipping raw ingredients and other materials to the factory from suppliers. Freight Ed Shipping-Out: The costs of shipping nished products to customer locations and distribution centers, Utilities Electricity: Approximately 10% for administrative ofce and the remainder for the factory. The factory portion Varies somewhat with production Volume, Utilities Gas (ovens): Approximately 5% for administrative office and the remainder for the factory. The factory portion varies somewhat with production volume. Water: All for the factory and Varies proportionately with production volume. Repairs 8t Maintenance: All for the factory, Rent expense: The factory uses about 85% ofthe total square footage of the building and the remainder is for the administrative office, Telephone 0. lntemet: All for the administrative ofce. Co-owners' salary: Linda Jackson and Taylor Johnson. Brokers' commissions: Generally 4% of sales. Income Tax: Average total tax rate is 32%