The Judge?s Best

Twelve months ago, Samson opened a coffee shop, The Judge?s Best, in Grace Medical Village?s former gift shop. Samson believed that he had the knowledge and understanding to make a success of this new business. He produced a quality product that people needed, priced the product to be very competitive, and selected a great location in a high-traffic area of the medical village.

Material Costs

The Judge?s Best uses a specialty brand of Yirgacheffe¹ coffee beans costing $6.60 per pound. Each pound of coffee beans produces 256 ounces of coffee. Coffee is sold in three sizes: a small cup holding 8 ounces, a medium cup holding 10 ounces, and large cup holding 12 ounces.

The cups needed to serve the coffee cost $.06 for the small cup, $.07 for the medium cup, and $.08 for the large cup. Lids cost $.04 per cup and are the same regardless of the cup size. Sleeves cost an additional $.05 per cup. On average, sugar and cream cost $.03 per cup for small cups, $.04 for medium cups, and $.05 for large cups.

Labor Costs

The Judge?s Best is open 12 hours each day, 7 days a week (365 days per year), and is staffed with three employees during the morning shift (7:00 a.m.-11:00 a.m.), two employees from 11:00 a.m. until 3:00 p.m., and three employees from 3:00 p.m. to 7:00 p.m. Labor is fixed cost, because the employees are paid regardless of whether coffee is sold. Samson worked 60 hours each week, on average, and was paid a salary of $42,000 during the first year of operations. Fringe benefits for Samson, including health insurance and payroll taxes, accounted for an additional $10,000 of costs for the company. Part-time employees worked an average of 24 hours each week and were paid $15.00 per hour. Payroll taxes and other costs $1.00 per hour for part-time employees. As shown in the following table, part-time employees worked from 656 hours to 727 hours each month:

Month Part-time Employee Month Part-time Employee

Labor Hours Labor Hours

January 722 July 727

February 656 August 727

March 727 September 705

April 705 October 727

May 727 November 705

June 705 December 727

Overhead Costs

During the first year of operations, the medical village charged rent of $2,000 per month. As part of the rental cost, the medical village provided furniture and fixtures for the shop, as well as nightly cleaning services. Samson leased a drip coffeemaker, refrigerator, coffee grinder, scale, and cash register for $150 per month, total. Samson paid directly for his utilities (electricity and water). The costs of electricity included the costs of heating and cooling the shop as well as the costs of running the electric appliances (refrigerator, coffeemaker, etc.).

For the first 12 months of operations, utility expenses were as follows:

Month Utility Expense

January $472

February $510

March $524

April $460

May $440

June $460

July $452

August $430

September $535

October $570

November $580

December $600

Total $6,033

Selling and Administrative Costs

Samson incurred $200 a month in accounting fees and spent $500 on various promotional and advertising materials during the year. He also paid $1,000 for liability insurance.

Sales Revenue

During the first year of operations, Samson set the shop?s prices to be slightly lower than their competitors?. The Judge?s Best sells a small cup of coffee for $1.75, a medium cup for $2.35, and large cup for $2.75. Sales revenue was as follows:

Month Sales in Cup of Coffee

January 9,300 Cups*

February 9,800

March 10,850

April 9,500

May 9,300

June 9,000

July 8,800

August 8,600

September 11,000

October 11,620

November 12,000

December 12,400

*Coffee sales average 10% small cups (8 ounces), 50% medium cups (10 ounces), and 40% large cups (12 ounces) (Sawyer et al., 2013).

Requirements

• Use regression analysis and the high/low method to calculate the monthly fixed cost and the variable component of the utility expenses incurred by The Judge?s Best. Use cups of coffee sold as the independent variable and utility expense as the dependent variable in your regression analysis. After calculating both numbers, round your final answer to two decimal places.
• Compare the regression results with the high/low results. Which model would you suggest?
• Calculate the contribution margin earned for each product (round to three decimal places and the weighted-average contribution margin (round to four decimal places).
• Assume the sales mix given in the problem. What is The Judge?s Best?s break-even point in terms of the number of cups of coffee sold during the year?
• Samson is contemplating adding a new 20-ounce product for the coming year and discontinuing sales of the small 8-ounce cup. The new cup, lid, and sleeve cost the same as the 12-ounce cup, but cream and sugar is expected to cost $.06 per cup instead of $.05 per cup. The new extra-large cup would be priced at $3.30. Samson anticipates that the new sales mix would be 50% for the 10-ounce cup, 30% for the 12-ounce cup, and 20% for the new 20-ounce cup. Assume that material, labor, and overhead costs remain the same in the upcoming year. How would this change in sales mix affect the company?s break-even point?
• Samson would like to increase sales and provide superior customer service in the second year of operations so that he may raise his salary to $70,000 (not including $15,000 of fringe benefits) while reducing his workload to 40 hours per week with two paid weeks of vacation during the year. Reducing his workload will require increasing the number of hours worked by part-time employees by 1,080 hours per year. Assume the introduction of the extra-large cup and the new sales mix as discussed in requirement 10. What level of annual sales would be required in order for Samson to reach his increase in sales goal? What does his customer service goal suggest about a change in managerial accounting and control systems?
• Write a two page analysis (i.e., executive summary) and discuss whether you think Samson will be able to reach his sales and service goals during the second year of operations (Remember, all written assignments must be in APA style [i.e., your analysis should include Title, Content, Appendix?depicting your computations, and Reference Pages]).

The Judge's 1 The Judge's Best Twelve months ago, Samson opened a coffee shop, The Judge's Best, in Grace Medical Village's former gift shop. Samson believed that he had the knowledge and understanding to make a success of this new business. He produced a quality product that people needed, priced the product to be very competitive, and selected a great location in a high-traffic area of the medical village. Material Costs The Judge's Best uses a specialty brand of Yirgacheffe 1 coffee beans costing $6.60 per pound. Each pound of coffee beans produces 256 ounces of coffee. Coffee is sold in three sizes: a small cup holding 8 ounces, a medium cup holding 10 ounces, and large cup holding 12 ounces. The cups needed to serve the coffee cost $.06 for the small cup, $.07 for the medium cup, and $.08 for the large cup. Lids cost $.04 per cup and are the same regardless of the cup size. Sleeves cost an additional $.05 per cup. On average, sugar and cream cost $.03 per cup for small cups, $.04 for medium cups, and $.05 for large cups. Labor Costs The Judge's Best is open 12 hours each day, 7 days a week (365 days per year), and is staffed with three employees during the morning shift (7:00 a.m.-11:00 a.m.), two employees from 11:00 a.m. until 3:00 p.m., and three employees from 3:00 p.m. to 7:00 p.m. Labor is fixed cost, because the employees are paid regardless of whether coffee is sold. Samson worked 60 hours each week, on average, and was paid a salary of $42,000 during the first year of operations. Fringe benefits for Samson, including health insurance and payroll taxes, accounted for an additional $10,000 of costs for the company. Part-time employees worked an average of 24 hours each week and were paid $15.00 per hour. Payroll taxes and other costs $1.00 per hour for part-time employees. As shown in the following table, part-time employees worked from 656 hours to 727 hours each month: Month Part-time Employee Month Labor Hours Part-time Employee Labor Hours January 722 July 727 February 656 August 727 March 727 September 705 April 705 October 727 May 727 November 705 June 705 December 727 1 Yirgacheffe is pronounced as \"Yir ga tchef A\" with emphasis on the 3rd syllable; or authors heard locals (i.e., Yirgacheffe Ethiopians) pronounce the first syllable as "year" but with a slight roll of the "r" and the [third] syllable as a long "a." So, it came out like "Year-r-r-gah-CHEFF-ay" (Coffee Forum, 2004). The Judge's 2 Overhead Costs During the first year of operations, the medical village charged rent of $2,000 per month. As part of the rental cost, the medical village provided furniture and fixtures for the shop, as well as nightly cleaning services. Samson leased a drip coffeemaker, refrigerator, coffee grinder, scale, and cash register for $150 per month, total. Samson paid directly for his utilities (electricity and water). The costs of electricity included the costs of heating and cooling the shop as well as the costs of running the electric appliances (refrigerator, coffeemaker, etc.). For the first 12 months of operations, utility expenses were as follows: Month Utility Expense January $472 February $510 March $524 April $460 May $440 June $460 July $452 August $430 September $535 October $570 November $580 December $600 Total $6,033 Selling and Administrative Costs Samson incurred $200 a month in accounting fees and spent $500 on various promotional and advertising materials during the year. He also paid $1,000 for liability insurance. Sales Revenue During the first year of operations, Samson set the shop's prices to be slightly lower than their competitors'. The Judge's Best sells a small cup of coffee for $1.75, a medium cup for $2.35, and large cup for $2.75. Sales revenue was as follows: 1 Yirgacheffe is pronounced as \"Yir ga tchef A\" with emphasis on the 3rd syllable; or authors heard locals (i.e., Yirgacheffe Ethiopians) pronounce the first syllable as "year" but with a slight roll of the "r" and the [third] syllable as a long "a." So, it came out like "Year-r-r-gah-CHEFF-ay" (Coffee Forum, 2004). The Judge's Month 3 Sales in Cup of Coffee January 9,300 Cups* February 9,800 March 10,850 April 9,500 May 9,300 June 9,000 July 8,800 August 8,600 September 11,000 October 11,620 November 12,000 December 12,400 *Coffee sales average 10% small cups (8 ounces), 50% medium cups (10 ounces), and 40% large cups (12 ounces) (Sawyer et al., 2013). Requirements Part I 1. Calculate the cost of coffee beans per ounce of coffee sold. 2. Calculate the cost of cups, lids, sleeves, cream, and sugar per unit for small, medium, and large cups of coffee and in total. 3. Calculate the total labor costs for the year 4. Prepare an income statement for The Judge's Best for the last year. You can assume that there are no inventories on hand at the end of the year. (All coffee and supplies purchased during the year are consumed.) 5. Determined whether the costs incurred by The Judge's Best are fixed, variable (with respect to number of cups of coffee sold), or mixed. Requirements Continue Part II 1 Yirgacheffe is pronounced as \"Yir ga tchef A\" with emphasis on the 3rd syllable; or authors heard locals (i.e., Yirgacheffe Ethiopians) pronounce the first syllable as "year" but with a slight roll of the "r" and the [third] syllable as a long "a." So, it came out like "Year-r-r-gah-CHEFF-ay" (Coffee Forum, 2004). The Judge's 4 6. Use regression analysis and the high/low method to calculate the monthly fixed cost and the variable component of the utility expenses incurred by The Judge's Best. Use cups of coffee sold as the independent variable and utility expense as the dependent variable in your regression analysis. After calculating both numbers, round your final answer to two decimal places. 7. Compare the regression results with the high/low results. Which model would you suggest? 8. Calculate the contribution margin earned for each product (round to three decimal places and the weighted-average contribution margin (round to four decimal places). 9. Assume the sales mix given in the problem. What is The Judge's Best's break-even point in terms of the number of cups of coffee sold during the year? 10. Samson is contemplating adding a new 20-ounce product for the coming year and discontinuing sales of the small 8-ounce cup. The new cup, lid, and sleeve cost the same as the 12-ounce cup, but cream and sugar is expected to cost $.06 per cup instead of $.05 per cup. The new extra-large cup would be priced at $3.30. Samson anticipates that the new sales mix would be 50% for the 10-ounce cup, 30% for the 12-ounce cup, and 20% for the new 20-ounce cup. Assume that material, labor, and overhead costs remain the same in the upcoming year. How would this change in sales mix affect the company's break-even point? 11. Samson would like to increase sales and provide superior customer service in the second year of operations so that he may raise his salary to $70,000 (not including $15,000 of fringe benefits) while reducing his workload to 40 hours per week with two paid weeks of vacation during the year. Reducing his workload will require increasing the number of hours worked by part-time employees by 1,080 hours per year. Assume the introduction of the extra-large cup and the new sales mix as discussed in requirement 10. What level of annual sales would be required in order for Samson to reach his increase in sales goal? What does his customer service goal suggest about a change in managerial accounting and control systems? 12. Write a two page analysis (i.e., executive summary) and discuss whether you think Samson will be able to reach his sales and service goals during the second year of operations (Remember, all written assignments must be in APA style [i.e., your analysis should include Title, Content, Appendixdepicting your computations, and Reference Pages]). coffee beans costing $6.60 per pound 1 pound 256 ounces of coffee. 1 ounce $0.02578125 small 8 ounces, / medium 10 ounces / large 12 ounces. 1 Yirgacheffe is pronounced as \"Yir ga tchef A\" with emphasis on the 3rd syllable; or authors heard locals (i.e., Yirgacheffe Ethiopians) pronounce the first syllable as "year" but with a slight roll of the "r" and the [third] syllable as a long "a." So, it came out like "Year-r-r-gah-CHEFF-ay" (Coffee Forum, 2004). The Judge's 5 Cup $.06 for the small cup $.07 for the medium cup $.08 for the large cup sugar and cream $.03 per cup for small cups $.04 for medium cups $.05 for large cups. Lids cost $.04 per cup (every size) Sleeves cost an additional $.05 per cup. Labor 1 day: 12hour (Fixed Cost) 3 people: 4h (7:00 a.m.11:00 a.m) 12h 2 people: 4h (11:00 a.m~3:00 p.m) 8h 3 people: 4h (3:00 p.m~7:00 p.m) 12h # labor expense total 32h / $15 / per day + Payroll taxes and other costs $1.00 / per hour Samson 60hours / per week $42,000 1st years health insurance and payroll taxes, accounted for an additional $10,000 of costs for the company Part timer 24 hours each week / $15.00 per hour Payroll taxes and other costs $1.00 / per hour Overhead Costs rent of $2,000 per month. 1. the medical village provided furniture and fixtures for the shop 2. nightly cleaning services leased of $150 per month drip coffeemaker, refrigerator, coffee grinder, scale, and cash register Samson paid directly for his utilities (electricity and water). electricity: heating and cooling the shop as well as the costs of running the electric appliances (refrigerator, coffeemaker, etc.). Selling and Administrative Costs $200 accounting fees / per month $500 on various promotional and advertising materials/ per years $1,000 for liability insurance per years Sale Revenue sells a small cup of coffee for $1.75 medium cup for $2.35 large cup for $2.75 1 Yirgacheffe is pronounced as \"Yir ga tchef A\" with emphasis on the 3rd syllable; or authors heard locals (i.e., Yirgacheffe Ethiopians) pronounce the first syllable as "year" but with a slight roll of the "r" and the [third] syllable as a long "a." So, it came out like "Year-r-r-gah-CHEFF-ay" (Coffee Forum, 2004). The Judge's 6 Coffee sales average 10% small cups (8 ounces), 50% medium cups (10 ounces) 40% large cups (12 ounces) total Labor Hours Total Labor cost / per years Samson + Employee : $52,000 + $139,960> $191,960 : Salary + Insurance & payrolls tax > $52,000 Salary> $42,000 / per years health insurance / payroll taxes> $10,000 / per year : Salary + payrolls tax & other cost > $128,400 + $8,560 > $139,960 Total Salary > 8,560h (Jan~Dec) x $15 (1 hour) > $128,400 (1 years) Payroll taxes and other costs $1.00 / per hour > 8,560h x $1.00> $8,560 / per years Month Sales in Cup of Coffee January 9,300 Cups / s: 930 / m: 4650 / l: 3720 February 9,800 s: 980 / m: 4900/ l: 3920 10,850 s: 980 / m: 4900/ l: 3920 April 9,500 s: 980 / m: 4900/ l: 3920 May 9,300 June 9,000 July 8,800 August 8,600 March September 11,000 October 11,620 November 12,000 December 12,400 Material Small 0.18 Media 0.20 Large 0.22 1 Yirgacheffe is pronounced as \"Yir ga tchef A\" with emphasis on the 3rd syllable; or authors heard locals (i.e., Yirgacheffe Ethiopians) pronounce the first syllable as "year" but with a slight roll of the "r" and the [third] syllable as a long "a." So, it came out like "Year-r-r-gah-CHEFF-ay" (Coffee Forum, 2004)