Sweet Celebrations: A Managerial Accounting Case Study*

WENDY L. SCHULTZ, University of Manitoba

Received on February 10, 2018; editorial decision completed on August 2, 2018

ABSTRACT The purpose of this teaching case is to demonstrate the application of contribution margin analysis in a custom bakery setting. This case is based on an actual company and illustrates the need for managerial accounting information for internal decision making, including sales mix and pricing decisions. In analyzing the case, students calculate contribution margin and contribution margin per unit of a constrained resource. Students are also required to consider the challenges faced by a growing small business, including the need to delegate responsibilities. Keywords Constrained resources; Contribution margin; Cost-volume-prot analysis; Sales mix

SWEET CELEBRATIONS : UNE TUDE DE CAS DE COMPTABILIT DE GESTION

RSUM L'tude de cas propose par l'auteure a pour but d'illustrer l'application de l'analyse de la marge sur cots variables dans le contexte d'une boulangerie offrant des produits personnaliss. Ce cas est inspir d'une socit vritable et tmoigne de l'importance des donnes fournies par la comptabilit de gestion dans la prise de dcisions internes, notamment celles qui ont trait la composition des ventes et l'tablissement des prix. Dans l'analyse de ce cas, les tudiants doivent calculer la marge sur cots variables et la marge sur cots variables unitaire d'une ressource limite. Ils sont galement appels se pencher sur les difcults que doit surmonter une petite entreprise en croissance, y compris l'impratif de dlgation des responsabilits. Mots cls : analyse cot-volume-prot; composition des ventes; marge sur cots variables; ressources limites

* Accepted by Pascale Lapointe-Antunes. I appreciate comments provided by two anonymous reviewers, Darren Henderson and Norman Sheehan, and participants at the Accounting Perspectives Case-writing Roundtables. This case study is based on an actual organization. However, pseudonyms have been used to conceal the company name and the name of the owners.

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THE CASE "I need a cookie!" you thought, as you looked at the images of delicious-looking baked goods on your client's website. Assume that you are a CPA, working at Harrison LLP, a mid-sized accounting rm. Your client, Sweet Celebrations, is a boutique bakery located in Winnipeg, Manitoba, Canada. Kayla and Laurie, the owners of the bakery, began baking and selling hand-decorated cookies at craft sales in 2003. They opened their rst storefront in 2008, and the business took off! Despite rapid growth and annual increases in sales, the bakery is not protable. It is now June 2015, and your rm has been engaged by Kayla and Laurie to investigate why their seemingly successful business is not generating a prot.

Background Kayla and Laurie met at a playgroup when their children were young. Laurie had a passion for baking and Kayla had a passion for design. They began baking and selling handdecorated cookies to friends and other people at playgroup and soon decided to expand the scope of their business. Fortunately, Kayla knew someone who owned a bakery, and Kayla and Laurie were able to use their commercial kitchen at no cost. Thus, they had no overhead and only needed to provide ingredients and their time. They began selling their cookies at craft sales in 2003 and were extremely successful. Over the next ve years, they continued to bake out of their friend's bakery and expanded their business to online sales across Canada. In 2008, they opened their rst storefront, expanded their product line, and made the decision to open as a 100 percent nut-free bakery. Being nut-free really set their bakery apart, and at the beginning, customers were very emotional, some crying in happiness that they could go somewhere and purchase baking for their children with nut allergies that was safe. The business grew rapidly. Within a year and a half, they had doubled their square footage. However, Kayla and Laurie experienced several challenges at the original location. There was no parking, and customers found it difcult to get to the store. Many of their customers were moms with strollers; so even once they came inside the store, it was hard to maneuver. Thus, Kayla and Laurie began looking for their next location, and, in 2011, they moved to a new, larger location. Over the next four years, the business grew and sales increased annually. By 2015, their customer base included families with allergies, schools, weddings, and corporate and wholesale clients. Their product lines had also grown and now included the original hand-decorated cookies, cupcakes, cookie cakes, homemade cookies, wedding cakes, a line of vegan products, and an assortment of other cakes. They had also diversied the business and offered decorating classes, birthday parties, and a larger variety of merchandise for sale. The bakers and decorators were always busy, and at one point in 2015, they had to stop accepting new orders because they could not accommodate them. Although pleased with the year-over-year increase in sales revenue, Kayla and Laurie were concerned that the business was not generating a prot. Indeed, the business had generated a net loss every year since moving to the new location. Kayla and Laurie decided to schedule a meeting with their accountant to investigate why their seemingly successful business was not protable.

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LAURIE. Thank you for meeting with us today. As I mentioned when we spoke on the phone, we are very concerned about the protabilityor should I say, lack of protabilityof our business. It just doesn't make sense to us. We are busy, and our revenues are growing each year. How can we be losing money? CPA. Prior to our meeting, I hada chanceto lookatyour website. Youhave an extensive product linevery diversied. I am interested to learn more about the revenues and costs for each of the products. Have you calculated the costs to produce each of your products? LAURIE. I hoped that you wouldn't ask me that... Not really. We are so busy with lling orders and running the bakery, that there is little time left for product costing. Honestly,

EXHIBIT 1 Comparative income statementsa

SWEET CELEBRATIONS STATEMENT OF INCOME AND RETAINED EARNINGS

Year ended June 30

2014 2013 2012 2011 2010 Sales $519,829 $507,150 $429,333 $290,500 $206,000 Variable costs Ingredients and packaging 144,217 140,017 118,310 80,052 56,767 Salaries and benets 145,347 141,790 123,281 83,416 59,152 289,564 281,807 241,591 163,468 115,919 Contribution margin 230,265 225,343 187,742 127,032 90,081 Operating expenses Advertising and promotion 15,595 15,214 12,880 8,715 6,180 Amortization 6,284 6,084 3,679 2,759 1,840 Insurance 1,323 1,260 960 480 390 Interest and bank charges 12,996 12,679 10,733 7,263 5,150 Management fee 84,000 84,000 84,000 36,000 24,000 Memberships and licenses 3,002 4,328 1,690 1,500 1,200 Ofce and miscellaneous 17,320 18,821 17,467 12,387 10,472 Professional fees 12,500 12,000 11,359 2,500 1,000 Rent 62,400 62,400 48,800 21,600 13,500 Repairs and maintenance 5,259 3,401 3,892 2,127 1,477 Supplies 7,411 6,770 6,499 4,256 3,017 Utilities 12,485 12,240 9,200 3,600 2,250 240,575 239,197 211,159 103,187 70,476 Net income (loss) before income taxes (10,310) (13,854) (23,417) 23,845 19,605 Provision for income taxes ---(2,623) (2,157) Net income (loss) for the year (10,310) (13,854) (23,417) 21,222 17,448 Retained earnings, beginning of year 22,826 36,680 60,097 38,875 21,427 Retained earnings, end of year $12,516 $22,826 $36,680 $60,097 $38,875

Notes: aAt the request of the owners, certain nancial information has been altered to maintain condentiality.

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product costing is overwhelming with all of the different products. I do have some notes here with cost information for our cupcakes. The ingredient costs are pretty stable. Our labor costs have increased, however, as we have had to pay more to our skilled decorators. CPA. And have you increased your prices to offset these cost increases? LAURIE. A little bit. We sell the cupcakes for $2.75. Our hand-decorated cookies are larger now, and they range in price from $5.00 to $7.50. We always have something seasonal in the front of the store. These cookies are made in large batches, and sell for $5.00. These are still a lot of work, but relatively fast to decorate as we make hundreds at a time, and Kayla and I decorate them ourselves. We also sell custom hand-decorated cookies. The minimum order size for these is 12 units, and the prices range from $6.00 to $7.50, depending on the size of the cookie and the complexity of the design. The custom handdecorated cookies take three times as long to decorate as compared to the stock cookies. I have brought photos of our hand-decorated cookies and cupcakes for your reference.

CPA. Wowthese look amazing! And what about your other products? Do you have a list of all of the available products and prices? LAURIE. Yes, I do. All of the information for the main products that we sell is in this document.

EXHIBIT 2 Select product images [Color gure can be viewed at wileyonlinelibrary.com]

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EXHIBIT 3 Select products and pricing

Item Additional Information Price Cookies Hand-decorated cookie (stock) Made in large batches; seasonal theme $5.00 Hand-decorated cookie (custom) Minimum order size is 12; price varies, depending on the size of the cookie and the complexity of the design $6.00-$7.50 Homemade cookies (retail) 6 for $5.50; 24 for $20.00 Homemade cookies (schools) $0.79 each Cupcakes Cupcake (standard) With icing and sprinkles on top $2.75 Cupcake (custom) With icing and hand-decorated cookie on top $2.75 + $0.80 Cakes Mini Slab Cookie cake (standard) Hand-drawn designs on slab cake. One custom cookie + 14 border cookies $59.00 Mini Slab Cookie cake (customized) Hand drawn designs on slab cake. One custom cookie + 7 of 14 border cookies are customized $59.00 + $10.00 for custom hand-decorated cookies Wedding cakes Three-tier cake decorated with textured buttercream icing $345.00

CPA. There is certainly a wide range of products! If you haven't calculated the cost to make all of these items, how have you determined your prices? KAYLA. We set prices based on the prices of other products that we sell. Some of the prices are also market-driven, and are based on the prices of competitors' offerings. We are also mindful of what we think clients would pay for a particular product. CPA. Hmmm... That's a problem. Without knowing the costs of making your products, you have no idea whether the price you are charging is recovering your costs, or generating any prot.Youcouldbesellingsomethingrightnowthatisactually losing moneyforyourbusiness. LAURIE. That's terrible! We are working so hard all of the time. It's hard to imagine that our work isn't generating prot. CPA.Doyouknowwhatpercentageofcustomersarepurchasingfromyouduetoallergies? KAYLA. Maybe half? I really don't know. And of course, these are just the customers who are telling us about the allergy. At the beginning, everyone talked about it because they were just so happy to be able to purchase safe baking for their children with nut allergies. But many of our customers don't have allergies. We just lled a $400 order for a third birthday cake and hand-decorated cookies. No allergy. And that customer orders all the time. We have a reputation for having good quality and a good product. You can't get this elsewhere in the city. Our customers want the best of the best and they are willing to pay for it.

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CPA.I'm going toneed youtocollectsomedataon the ingredientand labor costs for all of your productsand sendit tome. In the meantime, let's talk about someof the products, so thatIcanunderstandthestepsinvolvedintheproductionprocess.Let'sstartwithcupcakes. LAURIE. As I mentioned, we sell the cupcakes for $2.75. This is a standard cupcake with icing and sprinkles on top. We also offer the option to add a small custom handdecorated cookie on top of each cupcake for $0.80. CPA. Wait a minutea small custom hand-decorated cookie on top of a cupcake only costs $0.80? But don't you sell custom hand-decorated cookies for $6.00 to $7.50, depending on the size of the cookie and the complexity of the design? Are the small custom hand-decorated cookies that much quicker to produce? LAURIE. No, not at all. The process is still the samewe still have to mix the cookie dough, cut the cookies, mix the icing, prepare the icing bags, and decorate the cookies. I guess that the ingredient costs would be slightly less as the cookies are smaller. But the labor cost is basically the same. CPA. I see. What about your cookie cakes? Tell me about that product. KAYLA. A cookie cake is a round or slab cake with small border cookies (e.g., #5 for a fth birthday), with an additional large custom cookie. Prices for these range from $39 for an 8-inch round cake to $79 for a full slab cake. A mini slab cake sells for $59, and has 14 border cookies. However, we also offer the option to upgrade 7 of the 14 border cookies to custom hand-decorated cookies for a at rate of $10. We have an extremely creative decorator who has fantastic precision and amazing attention to detail. The custom cookies that she makes are amazing! CPA. More customization! How much longer does it take this decorator to make these seven amazing custom cookies compared to the standard number cookies? And what is her hourly rate of pay? LAURIE. Hmmm... I'm not really sure. We pay her $14.50/hour, but we don't keep track of time that way. I would say that it takes her 45 minutes to do the hand-decorated cookies on an 8-inch cookie cake. It would take longer to do the custom cookies as there are so many steps involved. There is the base layer of icing, and depending on the design, there could be four different colours of piping. The process is very time consuming, as there is a lot of stopping and starting. The cookies are baked, trayed, the base layer is applied, then they are trayed again. And then they are touched up to four more times before they even get on the cake. CPA. As soon as you touch something, it is costing you money. How many of these touches can you recover from the customer? A xed-price point for all of the customized work may not be a good pricing strategy. KAYLA. We set the company up to be a hand-decorated cookie company, and it's the customization that sets us apart. But the labor costs are killing us! CPA. What products do you sell that are less customized? You should be making a higher contribution margin on these products.

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LAURIE. The homemade cookies are doing really well. Our competitors use mixes and llers, but we don't. All of our cakes and cookies are baked from scratch, so it is just like home baking. The homemade cookies are fast and easy to make. We sell 6 for $5.50 or 24 for $20; most people buy 24 cookies. We also sell these cookies wholesale to schools for $0.79 per cookie. We have at least 12 schools that order homemade cookies every month, and each school orders 10-12 dozen cookies. CPA. Do you have information on the costs to produce the homemade cookies? LAURIE. No, but I can get it for you. We can get the bakers to keep track of their time to make each product. I will calculate the ingredient costs and send you the information.

EXHIBIT 4 Product costing

Panel A: Hand-decorated cookies

Stock Custom

Per unit Per batch of 100 Per unit Per batch of 12 Revenue $5.00 $6.00 Ingredient costs Cookie dough $11.25 $1.35 Icing 4.75 0.57 Total ingredient costs $16.00 $1.92 Labor per batch (minutes) Mix cookie dough 15 1.8 Cut cookies 45 5.4 Make icing 45 5.4 Package cookies 50 6.0 Total labor: baking/icing prep/ packaging (minutes) 155 18.6 Decorate stock cookies 167 Decorate custom cookies 60.0 Total labor (minutes) 322 78.6 Hourly rate for bakers/packagers $14.50 $14.50 Hourly rate for decoratorsa 0.00 0.00 Packaging Bag + ribbon + sticker $0.20 $0.20

Notes: The bakery's products are produced from scratch in batches. Ingredient costs include cupcake batter and cookie dough, and icing for decoration. The baked goods are then packaged for sale. Hand-decorated cookies are packaged in individual bags, tied with a ribbon and also include a Sweet Celebrations logo sticker. The minimum order size for custom hand-decorated cookies is 12 units, and prices range from $6.00 to $7.50, depending on the size of the cookie and the complexity of the design. aKayla and Laurie decorate the stock and custom hand-decorated cookies themselves; thus, they do not have to pay a decorator to do this work. However, they would like to move away from the day-to-day operations of the bakery and will need to delegate this work to a decorator in the future.

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Panel B: Homemade cookies

Per unit Per batch of 162

Revenue If sold for 6/$5.50 $0.92 If sold for 24/$20.00 0.83 Wholesale 0.79 Ingredient costs Cookie dough $19.72 Total ingredient costs $19.72 Labor per batch (minutes) Mix cookie dough 15 Roll and weigh cookies 30 Package cookies 20 Total labor (minutes) 65 Hourly rate for bakers/packagers $14.50 Packaging "6" bags + twine + sticker $0.15

Notes: Homemade cookies are packaged in bags of six, tied with twine, and also include a Sweet Celebrations logo sticker. A bag of six cookies sells for $5.50, and four bags of six sell for $20. Most people buy four bags (24 cookies). These cookies are also sold wholesale to schools for $0.79/cookie.

Panel C: Chocolate cupcakes (with cookie topper)a

Per unit

Cupcakes Per batch of 108

Per unit

Cookie Topper Per batch of 108 Revenue $2.75 $297.00 $0.80 $86.40 Ingredient costs Cupcake batter/cookie dough $ 15.69 $ 3.24 Icing 19.30 1.08 Total ingredient costs $ 34.99 $4.32 Labor per batch (minutes) Mix cupcake batter/cookie dough 15 15 Scoop cupcakes/cut cookies 20 30 Make icing 30 30 Decorate cupcakes/cookies 30 234 Package cupcakes 18 Total labor (minutes) 113 309 Hourly rate for bakers/decorators $14.50 Packaging "6" box + sticker + liner $0.65

Notes: Cupcakes are available in a variety of avors, including chocolate, vanilla, cookies n' cream, and red velvet. Standard cupcakes with icing and sprinkles on top sell for $2.75. Customers also have the option

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to add a small custom hand-decorated cookie on top of each cupcake for $0.80 (minimum order size is 12 cookies per design). Cupcakes are packaged in boxes of six and include a box liner and Sweet Celebrations logo sticker. aIngredient costs uctuate depending on the avor of cupcake. For example, the nut-free cocoa powder is made in Denmark and is very expensive. Thus, the contribution margin will vary, depending on the avor of cupcake analyzed. However, the costing information for all avors is not signicantly different from the information presented above.

CPA. Thanks. Finally, tell me about your wedding cakes. The price point for these is so much higher than your other products. Do they take a lot more time to make? LAURIE. Not at all. We sell a three-tier wedding cake decorated with textured buttercream icing for $345. Aside from the time that it takes to stack and level the wedding cakes, I don't think that a wedding cake takes much more ingredients or time than a birthday cake. We can make a three-tier wedding cake in about 90 minutes. CPA. A birthday cake that you sell for $59? The price of a three-tier wedding cake is $345! If the ingredient and labor costs really are comparable, you are making almost six times more contribution margin/hour on wedding cakes as compared to birthday cakes! If you want to maximize your prot, you should be selling more wedding cakes! KAYLA. That's a great idea in theory. However, the wedding cake orders are seasonal. Our wedding cake orders doubled last year, but I think that we only had 78 orders. We make birthday cakes all year long. CPA. That's a good point. Do you know how many units of each product you sell in a year? It would also be helpful to have information about the capacity of the bakery. How many bakers and decorators do you have? LAURIE. Yes, all of the units that we bake are tracked. I have a list of unit sales for hand-decorated and homemade cookies, and cupcakes for last year. I also have a list of our staff who work in the kitchen.

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EXHIBIT 5 Unit sales and capacity information

Item Annual Sales (units) Cookies Hand-decorated cookie (stock) 7,500 Hand-decorated cookie (custom) 17,500 Homemade cookies (retail) 12,480 Homemade cookies (schools) 2,520 Cupcakes Cupcake (standard) 3,750 Cupcake (custom) 21,250

Staff Hours/week (per employee) 2 Full-time bakersa 40.0 2 Part-time bakers 20.0 1 Full-time decoratorb 40.0 2 Part-time decoratorsc 17.5

Notes: aThe bakers are responsible for baking the products analyzed in the case, as well as many other products that the bakery produces that have not been analyzed in the case. bThe full-time decorator is responsible for decorating cupcakes and cookie cakes (information about cookie cakes is presented in Exhibit 3; however, they are not analyzed in this case). The full-time decorator spends 60 percent of her time working on the cookie cakes. cKayla and Laurie each spend 17.5 hours per week decorating the stock and custom hand-decorated cookies.

CPA. I think that I have gotten enough background information on your products to do the required analysis. Once I have received the missing information from you on product costs, we will get started. Are there any other issues that you would like help with? KAYLA.I 've got so many ideas for where I would like to take the business, but there don't seem to be enough hours in the day to get everything done. Time is a real constraint for us. Laurie and I are still so involved in the day-to-day operation of the business. It feels like we don't have enough time to work on the things, like product costing, that are important if we want to grow the business. CPA. That's certainly not a good situation to be in. We'll include some recommendations for you in our report

Question: Determine the number of units of each product that should be produced in order to maximize contribution margin, given the limited number of decorator hours available