MBA 6100 Case Study #1Spring 2021 Block 1

Each question refers to the same initial data. Treat each Part individually (unless otherwise specified). Ignore income taxes. Assume no beginning or ending inventories. Unless stated otherwise, all calculations and income statements should be based on a one-month period. Calculations and backup should be completed and submitted in Excel. Use proper Contribution Income Statement formatting - example below. Analysis can either be typed into cells in Excel (formatted to be easily legible) or typed into a text box in Excel. One Excel file is to be submitted for this case study. No additional files (Word documents or otherwise) will be accepted or graded. This case study is worth 100 points total.

Contribution Margin Format Example:

Data for all questions:Holes produces chocolate glazed donuts. Their donuts are packaged by the dozen, and are sold at many grocery stores across the country. The cost of manufacturing and marketing their donuts, at their normal factory volume of 15,000 boxes per month, is shown in the table below. Holes sells their donuts for $5 per box. Holes produces their donuts in the month they are sold, and will not produce more if they do not have the customer orders (demand) for them. Holes is making a small profit, but they would prefer to increase their Operating Income. One Unit = One Box of Donuts.

Hint: Fixed costs are shown on a per-unit basis in the table based on normal volume. However, fixed costs as a total do not change when volume changes, so you will need to determine total fixed costs first.

Data for all Questions:

Questions:

Part 1:(30 points)

A) Holes wants to understand their basic starting financial data. What is their monthly fixed cost, variable cost per box, and contribution margin per box? Show your calculations for each.

B) Prepare a one-month Contribution Margin Income Statement for the company using the given financial data at their normal factory volume. Include line items for each type of cost as well as subtotals for the variable and fixed costs.

C) What is the break-even point in units? (Show your calculations.)

D) What is the break-even point in sales dollars? (Show your calculations.)

E) Using a one-month Contribution Margin Income Statement, verify that your calculated break-even volume results in Operating Income of Zero. (Prepare the entire Contribution Margin statement at the break-even level.)

Part 2:(24 points)

Holes is thinking of increasing sales by offering cinnamon donuts. The investment needed for changing between flavors in their manufacturing process would increase fixed overhead costs by $1,000 per month. The variable materials cost (only variable material costs - not all variable costs) would increase by $0.25 per box. Market research estimates that the cinnamon donuts would still sell for $5 per box, and volume would increase 15%.

A) Prepare a revised monthly Contribution Margin Income Statement to include the revenues, detailed costs and income if Holes chooses to manufacture and sell cinnamon donuts instead of their normal chocolate donuts.

B) What is the new break-even point in units for the cinnamon donuts?

C) What is the new break-even point in sales dollars for the cinnamon donuts?

D) If volume did not increase when making the cinnamon donuts (stayed the same as original monthly volume), is Holes better off producing chocolate donuts or cinnamon donuts? Why? Support your answer with data in contribution margin income statement format.

Part 3: (24 points)

Holes is thinking of cutting costs by using a different flour supplier. Their variable material costs would decrease by 25% (only variable material costs - not all variable costs). The quality of the flour is lower, so Holes estimates that their additional fixed scrap costs related to the flour quality would be $3,000 per month. They would not change the pricing of their donuts.

Note: Use the initial data provided for all questions. Ignore the cinnamon option from Part 2.

A) Prepare a revised monthly Contribution Margin Income Statement to include the revenues, costs and profits of using the different raw material (flour) supplier.

B) What is the new break-even point in units for the donuts with the supplier change?

C) What is the new break-even point in sales dollars for the donuts with the supplier change?

D) If their sales end up decreasing because of the change in quality, how much of a reduction in sales (dollars and units) could Holes handle and still keep their net operating income the same as before the supplier change? Show your data in a Contribution Margin Income Statement.

Part 4: (22 points)

Using the information provided by Parts 1, 2 & 3, Compare the different scenarios

A) Using the contribution margin income statements for the original chocolate donuts (Part 1), the cinnamon donuts (Part 2), and the original chocolate donuts with the supplier change (Part 3), compare the various options for Holes. Which scenario is the most profitable? Which is the least profitable?

B) What are some potential non-financial metrics or data that could influence Holes's decisions. How could these influence Holes in a direction different than the financial data?

C) Write a memo to the CFO that presents the pros and cons of the potential supplier change. Include the potential impacts on revenue, costs, and operating income, as well as any other factors or consequences of this decision. Be sure to include quantitative evidence and backup as well as any qualitative (non-financial) analysis.

Note: Your letter will be included in your Excel document - either in the Excel cells or in a text box.

Hint: The analysis is expected to be thorough. Expect to present approximately 400 words, and support your analysis with data (either given or calculated). Remember that this is a letter to the CFO, so proper grammar and spelling is expected.