Peanut Butter Delights

Oscar and Zoe have grown their small event-based cookie kiosk into one of the fastest growing single product confectionary companies in Canada.The company sold 2.5 million packages of cookies last year, all based on their grandmother's famous peanut butter cookie recipe.

Neither business partner ever dreamed this business could have grown so quickly. They started 4 years ago setting up small kiosks at local fundraising events.Last year the company was forced to rent a new manufacturing facility to support the strong demand. Oscar and Zoe believe the company is now at a stage where they should bring in a more experienced operations manager to help them with their next phase of growth.The company has received a few expressions of interest from larger companies looking at acquiring them, but both partners want to maintain control and double sales to over 5 million packages.Their new facility is expected to be sufficient for this growth.

Jonah, is an experienced operations manager having worked in one of Canada's largest foodservice companies for over 20 years.Oscar and Zoe decided to bringJonah in as a consultant to see what he recommends, if he impresses them with his strategy and they get along, they intend to offer Jonah a permanent position as the company's chief operating officer (COO).

Jonah is quite excited about his new client, he believes their cookies have a lot of growth potential.He is well aware of the strong demand for high protein snacks with minimal ingredients (the company only uses 3 ingredients).Jonah is very surprised when Oscar and Jonah tell him that they are currently barely covering their costs, and that neither partner has taken a salary from the company.Both are still living with their parents. Jonah is convinced he can improve profitability.

Oscar and Zoe provide Jonah with the following information:

Last year the company produced and sold 2.5 million packages of cookies.

The cookies are sold to retail distributors in boxes of 20 packages.

oThe cookies are sold to consumers in packages weighing 150 grams/pkg.

Peanuts, the primary ingredient are purchased at a cost of $3.25/kilogram.

It takes 120 peanuts to produce one 150 gram package of cookies.

To ensure customer satisfaction the company ensures each bag contains 160 grams, this also allows for the usual amount of crumbs at the bottom!

20 peanuts weigh approx. 30 grams

The company is able to sell the peanut shells to a company the manufactures kitty litter, and receives $0.40/kg, which the company uses to lower its cost of peanuts.

The other main ingredient is a very high quality whipped organic butter, which is purchased at a cost of $3.50/gram.Zoe and Oscar believe this is the company's secret ingredient.

It takes 5 grams of butter to produce one package of cookies.

The third ingredient is eggs, however it is very small on a per package basis that it is added to overhead.

Packaging cost $0.05/each.

Shipping boxes cost $0.40/each.

Current direct labour hours are:

oBaking process12,500

oInspecting process 5,000

oPackaging 7,500

oMachine operators 4,500

The hourly labour rates are currently:

oBaker $25

oInspectors$10

oPackaging$12.50

oMachine operators$15

Oscar and Zoe noted that due to a new oven system recently installed, the baking and inspection efficiency will be improved by 5% going forward.

Overhead is applied on the basis of direct labour dollars.

Oscar and Zoe noted that variable overhead is typically 150% of direct labour costs.

Budgeted fixed overhead is $1.5 million and is expected to remain flat for next few years.

a)(5 marks) Discuss what you believe is the primary issue with the current cost structure?Provide one recommendation to improve profitability.Discuss possible constraints that may impact future profitability.

b)(5 marks) If the company maintained production of 2.5 million packages of cookies for next year, and 460,000 kilograms of peanuts were used, what is the materials usage variance?Why is this measure important?Explain your result.