In 1986, Aunt Connie was asked to make some cookies for an annual fundraiser. They were willing to pay $50 for 500 cookies instead Aunt Connie offered them 600 cookies for $55. She realized she would be spending $35 on ingredients for making 600 cookies and for 300 cookies it would cost her $10 to bake so it would be $20 regardless 300 or 600 cookies. By charging an extra $5, she would cover her cost and give the club more cookies. This showed people that she had a sense for business.
Today Maria Villanueva, the grandniece of Connie, is the CEO of the company and her goal for Aunt Connie??™s Cookies is to increase profit and she needs to determine the best way to make this happen.
Maria is responsible to decide how money will be spent to make Aunt Connies Cookies succeed without going into debt.
First Maria will look at how the price increase for lemon creme and real mint cookies in the last few months has decreased its volume.
So Maria needs to maximize her contribution margin and operating profits and she has two choices. Usually when a price reduction occurs, demand will increase so she could revise the unit prices on both the cookies or reach out to more retailers by increasing ad expenses by half on both cookies. Maria must determine how each type of cost effects changes. The advertising expense is a fixed cost that will not change even when the quantity of cookies produced varies. Looking at the cost of ingredients needed to produce the cookies it is a variable cost.
These costs will rise as the number of cookies produced increases. The correlation between costs, volume, and the impact on profit of these choices is seen in the contribution margin during the simulation.
Maria can use the cost accounting system to help determine the most profitable price point for cookies by evaluating the cost – volume – profit relationship. ? Maria wanted to reduce the price of lemon cremes and mint cookies to increase volumes. Maria increases fixed costs through increased advertising. She also decides to increase the margin to the distributors to help increase volumes. ? Her decision that she made helped increase her sales and profit.
Maria was then faced with an offer for a bulk order from a client who wanted to buy a million packs of real mint cookies at $1.20 a pack or nothing. If Maria accepts the order, this will reduce her current volumes being produced in the market and rejecting the order could mean under utilization of capacity. She decided to accept the bulk order by reducing the current production volumes for both cookies. When one is trying to maximize operating profits, it is better to produce more of the product that has a greater contribution margin per unit; in this case it was the lemon creme cookies.
The next decision that Maria had to face was a competitor??™s peanut butter cookie manufacturing unit was up for sale. The competitor??™s owner gave two options to Maria, first she could buy the unit and use the capacity to make lemon creme cookies or buy the unit and continue to make peanut butter cookies. Maria decided to buy the unit and use the capacity to make lemon cremes and manufacture 600,000 packs seeing the breakeven point is 563,000 resulting in operating profits from the new unit.
With the holidays just around the corner, the bakers wanted to come out with a special cookie called the Chocorones. Maria needs to decide to up her labor force or her equipment. She decided to update her labor force seeing this is a seasonal cookie and it is more a less an indifference point between the two.
By making the right decisions, Maria has increased her profits and acquired an extra business unit helping her use the capacity to make her cookies. She will continue to carry out her Aunt Connie??™s legacy and make profit at the same time.