Question
This case study is about a small manufacturing company. Each question refers to the same initial data. Treat each question separately. Ignore income taxes. Assume
This case study is about a small manufacturing company. Each question refers to the same initial data. Treat each question separately. Ignore income taxes. Assume no beginning or ending inventories. Calculations and backup should be completed and submitted in Excel. Use proper Contribution Income Statement formatting. Analysis can either be typed into cells in Excel (formatted to be easily legible) or typed into a text box in Excel. Leave any formulas used in the Excel files (do not hard code or type in results); this allows for partial credit if possible.
The case study is worth 100 points. The submission will be one Excel file covering all parts of the Case Study (multiple tabs can be used if desired). Only one Excel file should be submitted. Any other file types or submissions (Word, etc) will be ignored.
MBA 6100 Case Study #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: Choco produces chocolate breakfast cereal. Their cereal is sold at many grocery stores across the country. The cost of manufacturing and marketing their cereal, at their normal factory volume of 25,000 boxes per month, is shown in the table below. Choco sells their cereal for $3 per box. Choco produces their cereal in the month it is sold, and will not produce more if they do not have the customer orders (demand) for them. Choco is making a small profit, but they would prefer to increase their Operating Income.
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) Choco 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)
Choco is thinking of increasing sales by offering marshmallows in their cereal. The investment needed for adding marshmallows to their manufacturing process would increase fixed overhead costs by $5,000 per month. The variable materials cost (only variable material costs not all variable costs) would increase by $0.50 per box. Market research estimates that the cereal with marshmallows would sell for $3.50 per box, and volume would increase 25%.
A) Prepare a revised monthly Contribution Margin Income Statement to include the revenues, detailed costs and income if Choco chooses to manufacture and sell cereal with marshmallows instead of their normal cereal.
B) What is the new break-even point in units for the cereal with marshmallows?
C) What is the new break-even point in sales dollars for the cereal with marshmallows?
D) If volume did not increase when making the marshmallow cereal (stayed the same as original monthly volume), is Choco better off producing cereal with or without marshmallows? Why? Support your answer with data in contribution margin income statement format.
Part 3: (24 points)
Choco is thinking of cutting costs by using a 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 Choco estimates that their additional fixed scrap costs related to the flour quality would be $2,000 per month. They would not change the pricing of their cereal.
Note: Use the initial data provided for all questions. Ignore the marshmallow cereal 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 cereal with the supplier change?
C) What is the new break-even point in sales dollars for the cereal 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 Choco 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 cereal (Part 1), the cereal with marshmallows (Part 2), and the original cereal with the supplier change (Part 3), compare the various options for Choco. Which scenario is the most profitable? Which is the least profitable?
B) What are some potential non-financial metrics or data that could influence Chocos decisions. How could these influence Choco 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.
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