You have been invited to participate in an accounting competition. You will be making a presentation to Michelle and Vishayla who are sisters-in-law who have recently opened a bakery specializing in cakes.

They realized their love of baking after they married brothers, Josh and Cody. For a few years they created cakes for family and friends. The demand for their cakes had grown to the point where they could no longer use their kitchens as their bakery.

They rented a store front on the Boulevard in Colonial Heights that used to be a diner. It had a kitchen that was converted into a bakery with large ovens, mixing bins, and prep/decorating area. The owner made all the conversions for the bakery. They currently sell to individuals, area local stores, and event centers for parties/weddings. To get their growing business off the ground they hired a supervisor and two wage employees who work as orders are received. The rest of their payroll includes a financial accountant and one office staff who prepare invoices and does other office duties. They have also hired a sales person who is paid based on the number of cakes sold. Of the store front they have rented, 80% is used as the bakery and 20% is used as office space.

Your assignment is two-fold:

1. They have asked you to prepare managerial accounting data of their current operation. They know the amount of ingredients in each cake but do not know how much labor to add to the cost and the amount of overhead to allocate to each cake. The accountant they have hired is good at preparing financial statements they need to give to the bank and prepare taxes and payroll but is not a managerial accountant and is not able to help. They need to know the cost per cake in order to be able to calculate their cost of goods sold. A list of the calculations they would like for you to prepare for them, as well as, information concerning next periods operations is on the following page.

2. Michelle and Vishayla are thinking of expanding their operations. They want to build a new bakery that will allow them to expand their operation. The new building will allow them to add more ovens, larger prep and decoration stations, and be able to open a retail store in the front of the building. A piece of land is available close to Fort Lee which will give them greater access to military and civilian personnel. They want you to determine the feasibility of this new venture. The needed calculations and relevant data are on the following pages.

Task 1

Michelle and Vishayla need to know the cost per cake so they can be sure they are charging enough for each cake. They also need this to calculate the cost of goods sold. They feel that direct labor hour is the best cost driver for allocating manufacturing overhead. They pay their wage employees $12.00 per hour. Due to the type of production that they have, they believe job order costing is the best costing system. Here is the estimated data for 2020:

Type of cake	Expected Annual sales	Selling Price per cake	Raw Ingredient (Direct Materials)cost per cake	Direct Labor Hour per cake
1 tier wedding cake	200	$250	$40	4
2 tier wedding cake	300	$300	$50	6
3 tier wedding cake	250	$400	$75	8
Large sheet cake	450	$120	$25	3
Medium sheet cake	600	$90	$15	2
Small sheet cake	750	$50	$10	2

Expense	Estimated annual amount
Total direct materials	$69,500
Total direct labor	$103,800
Total factory overhead	$47,900
Selling Cost	$17,500
Adminstrative Costs	$108,700
Total Costs	$347,400
Variable verses Fixed Costs
Total Variable Costs	$197,400
Total Fixed Costs	$150,000
Total costs	$347,400

Requirements:

1) Calculate the cost per cake

2) Create a budgeted Traditional Income Statement and a Contribution Income Statement

3) Calculate the breakeven point in dollars

4) Calculate a target profit in dollars for a profit of $125,000.

Task 2

They believe it will cost them $250,000 to purchase the land near Fort Lee and to build a bakery and storefront. Your task is:

1) Calculate Return on Investment if the expected increase in net income, due to opening the new location near Ft. Lee, is $35,000.

2) Calculate Asset Turnover Rate and Margin if the expected sales increased to $450,000

3) Calculate Residual Income if the required rate of return is 15%.

You will prepare a three page paper that should include your recommendations and calculations. There needs to be two pages of text with the last page being charts and graphs.

Your grade will be calculated as follows:

Paper

Accuracy of calculations 60%

Clarity of findings 40%