Thomahams Simply Delicious

Two couples, the Thomases and the Abrahams, have been neighbors for over 15 years. They discovered that the four of them have exceptional baking skills. They have all traveled extensively, taken baking classes, and have each worked in respectable, prestigious bakeries and restaurants.

Over the years they have united their baking skills and baking passions and have taken advantage of every opportunity to distribute their baked good to family and friends. It did not take long before their mere sharing of baked goods developed into orders. The Thomases and Abrahams found themselves in the catering business. That is, they were quite often hired to cater the dessert section of menus for wedding, parties, banquets, etc.

About two and a half years ago, the Thomahams SImply Delicious Companywas legally formed and licensed to do business. Demand grew such that their kitchens were deemed too small for business. They relocated to a much larger facility and have a small staff of workers. The Thomases and Abrahams expanded their operations to include private catering as well as placement in grocery stores. Consequently, they recently retained the services of Tina Randolph, a CPA, to assist them in managing the financial affairs of the company. The Thomases and Abrahams see a profitable future for Thomahams SImply Delicious Company. They have asked Tina to focus specifically on growth and profitability.

Ms. Randolph has determined that there is a need for a lot of cost analysis, especially regarding the determination of the cost of baking their specialty, cookies. Her goal is to determine a product costing system that can be used for pricing decisions and product-line planning and budgeting. She has asked you, one of her summer management interns, to provide basic information that would serve as a starting point. You provided Exhibit 1 showing actual costs and revenue data for 2019. During that year Thomaham sold 12,800 baked items (cakes, pies, etc.) for approximately $30 each.

After receiving the information, Ms. Randolph asked you to further classify the expense as a product (direct material, direct labor, or factory overhead) or period costs and (2) classify each of the expenses as either variable, fixed, or mixed . She asked that you clearly justify the classification you assign to each expense.

Next, Ms. Randolph wants you to determine breakeven for Thomahams based on your classifications in (2) above. You can consider any mixed costs to be 40% variable, and 60% fixed. What is your evaluation of how Thomaham is doing relative to breakeven?

>>>Write a thorough memo to Ms. Randolph in response to her request. Be sure to present your responses clearly. You may present exhibits to accompany your memo.

Exhibit 1.

Thomaham Simply Delicious Company
Income Statement
For the Year Ended December 31, 2019
Sales ($30 per baked item)		$384,000
Expenses:
Raw materials (Baking)	$163,967
Labor (Bakers' salaries)	99,384
Wages (General Bakery area, hourly)	28,684
Supplies (General Bakery area)	1,942
Shipping to Customers (delivery truck)	13,888
Electricity (general baking area)	8,700
Water (general baking area)	2,147
Routine Monthy Maintenance (general baking area)	7,380
Wireless and Telephone (Administrative)	1,150
Salaries-Owners (administrative)	50,000
Sales Commission (salesforce)	12,334
Total Expenses		389,576
Net Income		($5,576)