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Part 1 Always aspiring to be an entrepreneur, you finally believe you may have found your niche. While you were polishing off the last of

Part 1

Always aspiring to be an entrepreneur, you finally believe you may have found your niche.

While you were polishing off the last of the brownie mix your sister gave you for the holidays last year, you realized that it was the only homemade gift you had gotten for quite some time, and further realized that you had never given a gift made with your own hands. Justifying your absence of creativity to a lack of time, it comes to you that perhaps there would be a market for handmade goodies that people could simply purchase off the shelf and give as special gifts.

You brainstorm with your two roommates and come together with a plan to prepare for the birth of SABCO, Inc., a name created as an abbreviation for Sand Art Brownie Company.

It is early April 2021, and the three of you research the holiday market and decide that all products to be sold for the holiday season must be ready to ship to retailers by October 1, 2021. This will allow the three of you to spend the remainder of the year processing orders.

The three of you determine the following:

  1. Each of you will contribute $15,000 on July 1, 2021 (borrowed from relatives) to form a corporation. You realize that another form of business may be less expensive but know that this is just the beginning of a wildly successful business and want to go ahead right away with the incorporation of the business. The par value of the stock is $1.00 and each of you purchase 5,000 shares of stock.
  2. You estimate that you can sell the brownies for $15 per container. You believe this price will make the product attractive enough to sell 100,000 containers of product for the 2021 holiday season. All the shareholders agree this would be a competitive price and a fine start to your business.
  3. Fifty percent of sales are expected to be taken online and paid by credit card immediately upon ordering. The bank charges a credit card fee of 2% of the transaction. This is considered a selling expense. The other 50% of sales will be sold to a wholesaler who will purchase in bulk at $13.50 per container. They will pay 60% at time of delivery and the remaining 40% will be collected the following month.
  4. Your roommate gets to work on building a great website and lays the groundwork to get your website to pop-up based on several appropriate key-word searches such as holiday gifts and brownies. Her hard work results in a one-time website fee of $10,500 in July, and $100 per month in maintenance fees from July December 2021. These costs are not capitalized but expensed immediately because you are sure that the website will have to be completely revamped after the holiday to gear up for the future.
  5. Factory space will be rented for a period of five months (July, August, September, October, and November) at $800 per month for production of the Sand Art Brownies. Utilities for the space are estimated to be $300 each month which you are also responsible for per the lease agreement. After the five months of production, the equipment will be stored in your garage, until the next holiday production rush. Due to the perishability of your product, your production must also be seasonal.
  6. Equipment required to run the factory is needed up front and will cost $18,000. The equipment will be depreciated over 5 years under the straight-line method. The salvage value will be negligible.
  7. Each day, after production, the finished product will be shipped to a fulfillment house that will store the containers until they are shipped. The rent for the agreed upon space at the fulfillment house is $2,500 per month. The rental agreement is for July through December 2021. Included in this fee are order processing charges and shipping and handling fees. Minimal returns after the holiday season are expected, but a return policy on the website instructs customers to ship returned items to your home.
  8. A small office will be rented downtown to handle administrative issues, field sales calls, and process online orders. The rent for this space is $250 per month and is leased from July December 2021. Utilities are included in the rent.
  9. All bills will be paid immediately with cash, as you suspect credit will not be established early on by your suppliers and this will be the most conservative approach in estimating your cash needs.
  10. Each of you will take a salary per month of $3,000. These three salaries will be the only salaries besides the direct labor and factory overhead personnel. (The tax consequences of these salaries will be ignored in this project).
  11. To be conservative, you expect to sell the same number of containers each week for 8 weeks (4 weeks in November and 4 weeks in December). You only have capacity to produce 6,000 containers in a week and you want to have at least two weeks of inventory on hand in advance of any sales. Additionally, you would like to run your production at maximum capacity in July, August and September, prior to sales beginning to allow for the unexpected. You only produce enough in October and November to have the expected two weeks of inventory on hand. For simplicity, assume there are four production weeks per month.
  12. To make sure that there will be enough product for production, all materials are purchased ahead of production. You decide that after the first month you would like to have enough materials for the first two weeks of production on hand at the end of the preceding month.
  13. You know that you will not have enough money to finance the operation until the money from the sales starts to come in. You are in the process of putting together a business plan to include the following for the period from July through December 2021:
    1. Direct labor worksheet
    2. Factory Overhead Worksheet
    3. Job Cost Detail
    4. Production Budget
    5. Direct Materials Budget
    6. Direct Labor Budget
    7. Selling and Administrative Expense Budget
    8. Cash Budget
    9. Budgeted Financial Statements

You mean to provide the business plan to the bank. You expect they will grant you a line of credit to make up your cash shortfalls through the end of the selling season. You will be applying for a line of credit that you can access at the beginning of each month to meet your cash flow needs. Because you are only allowed to draw on your line once a month, you decide that you would like to maintain a cash balance at the end of the month equal to your required purchases the subsequent month. You will make one lump payment at the end of December to pay off your borrowings plus interest at the rate of 6%. Simple interest is accrued and paid at the end of the year.

  1. The three shareholders feel comfortable with the plan outlined above; however, no cost studies have been done on the product to determine the cost of sales for each container. The information you do have is a recipe jotted down on the back of a napkin that your sister scrawled out when you asked her for the recipe. The napkin reads as shown in Figure 1.
  2. You plan to use a job cost system to capture the costs per batch. A job cost system is chosen over a different cost system because you and your business partners expect the same machinery and production lines will be used for off-season products in 2021 and beyond. Those products are yet to be determined.

Instructions:

Determine the standard cost of your product, prepare the master budget materials for the bank, and compute financing needs by completing the following items. Note: payroll taxes, interest, and taxes are purposely excluded from this project. All of the Figures and Tables are contained in the attached excel document. You will turn in the excel workbook and the Word document to D2L.

1. Use the Materials Requirements Worksheet (Table A2) to estimate the total cost of materials you expect to consume through the end of production by making the product in batches of 4. Also compute the total materials cost per container. All normal scrap and waste for each batch are included in the recipe for the batch and need not be accounted for further. The amounts (quantity) and cost (price paid) for ingredients will be used to determine the standard direct material cost for your product. All materials are purchased according to the shopping list at Table A1 to complete batches of four. You will complete the actual cost during Part II. Note: tags for container lids were donated by a family member in the office supply business.

2. Use the Direct Labor Requirements Worksheet to estimate the total cost of labor that it will take to produce a batch of 4 containers (Table A3). You have considered the following operational factors when determining your direct labor cost estimates. You estimate that it will take you 15 minutes to do each batch. Your assembly line will include the following personnel.

  • Direct Labor Worker 1 Salt, Flour II, chocolate chips
  • Direct Labor Worker 2Flour I, Brown sugar, vanilla chips
  • Direct Labor Worker 3Cocoa, granulated sugar, lid

All direct labor is hired through a temporary employment service which has guaranteed the workers needed for the time of production. The temporary agency charges $15.00 per hour for each direct laborer. The standard rate of pay is $15.00 per hour.

3. Use the Factory Overhead Rate Worksheet provided (Table A4) to determine the cost charged to each container for Factory Overhead (your cost object will be each good container produced). The Factory Overhead consists of the rent for the factory space, the cost of factory utilities, the monthly depreciation on the factory equipment, and indirect labor salaries and benefits of $40,000 for each month of production. The indirect labor is hired through a temporary professional placement firm and you are pleased with their guarantee of available workers for the production period of July through the second week in November. The workers needed are as follows:

  • Logistics Coordinator
  • Material Handler I
  • Inventory Specialist
  • Quality Control I
  • Engineer I
  • Maintenance I
  • Production Supervisor

Again, the cost object for your predetermined factory overhead rate is based on the number of good containers produced.image text in transcribed

Table A2 Materials Requirements Worksheet Unit of Measure each per unit tsp. oz. Amount Required in Batch of 12 (from your sister's recipe) 4 Quart-size deli container with lid 9 tsp. salt 12 oz. Cocoa 42 oz. Chocolate Chips 42 oz. Vanilla/white chocolate Chips 50 oz. Brown Sugar 5 lb. All-purpose Flour (80 oz.) 5 lb. Granulated Sugar (80 oz.) Materials Qty Required per Container 1 0.75 1.00 3.5 3.5 4.17 6.67 6.67 Materials Qty Required in Batch Materials Cost Materials Cost Materials Cost of 4 Per Batch of 4 Per Container 4.000 $ 0.96 $ 3.83 $ 0.96 3.000 $ 0.01 $ 0.02 $ 0.01 4.000 $ 0.35 $ 1.40 $ 0.35 14.000 $ 0.19 $ 2.61 $ 0.65 14.000 $ 0.20 $ 2.79$ 0.70 16.667 $ 0.07 $ 1.14 $ 0.28 26.667 $ 0.02 $ 0.56 $ 0.14 26.667 $ 0.04 $ 1.00 $ 0.25 oz. oz. oz. OZ. OZ. Totals $ 3.34 13.35$ (Per Batch) (Each) Units to be Produced 2020 100,000 Total Cost of Materials Projected in 2020 $ 333,651 Note the tag has been donated by a relative that owns a office supply store and you need not include those items in the materials cost. Table A2 Materials Requirements Worksheet Unit of Measure each per unit tsp. oz. Amount Required in Batch of 12 (from your sister's recipe) 4 Quart-size deli container with lid 9 tsp. salt 12 oz. Cocoa 42 oz. Chocolate Chips 42 oz. Vanilla/white chocolate Chips 50 oz. Brown Sugar 5 lb. All-purpose Flour (80 oz.) 5 lb. Granulated Sugar (80 oz.) Materials Qty Required per Container 1 0.75 1.00 3.5 3.5 4.17 6.67 6.67 Materials Qty Required in Batch Materials Cost Materials Cost Materials Cost of 4 Per Batch of 4 Per Container 4.000 $ 0.96 $ 3.83 $ 0.96 3.000 $ 0.01 $ 0.02 $ 0.01 4.000 $ 0.35 $ 1.40 $ 0.35 14.000 $ 0.19 $ 2.61 $ 0.65 14.000 $ 0.20 $ 2.79$ 0.70 16.667 $ 0.07 $ 1.14 $ 0.28 26.667 $ 0.02 $ 0.56 $ 0.14 26.667 $ 0.04 $ 1.00 $ 0.25 oz. oz. oz. OZ. OZ. Totals $ 3.34 13.35$ (Per Batch) (Each) Units to be Produced 2020 100,000 Total Cost of Materials Projected in 2020 $ 333,651 Note the tag has been donated by a relative that owns a office supply store and you need not include those items in the materials cost

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