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Dear Tutor, it is an accounting question. "The...

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Dear Tutor, it is an accounting question. "The Bake House Abstract The Bake House is a non-profit organization whose primary function is to sell baked goods and beverages to students in a large campus residence hall complex. In completing the case, students utilize information provided about the costs and previous pricing structure of The Bake House, along with information they collect about competitors' product offerings, prices, and accompanying services, and their own knowledge of The Bake House's customers, college students and their parents, as a basis for making pricing decisions. Once they have completed the pricing analysis, students use the resulting variable costing income statement to perform CVP and to analyze a decision to potentially outsource The Bake House's operations. 1. Background The Bake House, a retail bakeshop located within housing and dining services of Excel e University, first opened in 2008. The business was established by the campus-wide, nonprofit housing and dining service to provide baked goods, including breakfast and dessert items, to students who live in the residence halls. Hotel and restaurant management students originally operated The Bake House. These students were in charge of the selling and management functions of the operation, but civil service employees produced the baked goods. The only exception to these procedures was that students baked the cookie dough in the shop during normal business hours. Prices for all products sold by The Bake House were determined by the student managers, who set prices based on what they considered to be reasonable for the market. These prices have remained the same since The Bake House began operating and are shown in Table 1. Table 1. Original prices Menu item Price 16 oz. Bottled juice RM0.90 Milk RM0.30 12 oz. Coffee RM0.40 14 oz. Soft drink RM0.50 2 Menu item Price 20 oz. Soft drink RM0.60 33 oz. Soft drink RM0.90 9?13? cake RM9.00 18?13? cake RM12.00 9? Round cake (2 layer) RM10.50 Large cookie RM3.00 Extra large cookie RM6.00 Classic baga RM3.00 Gourmet baga RM3.50 EeU baga RM4.00 Jumbo cinnamon roll RM0.75 Regular cinnamon roll RM0.50 Jumbo pecan roll RM1.00 Regular pecan roll RM0.75 Muffin RM0.40 Turnover RM0.50 Bagel RM0.40 Classic cookie RM0.30 Gourmet cookie RM0.50 Brownie RM0.50 Rice Crispy treat RM0.75 a These items are designed for gift-giving. They consist of several items, such as a bottled Mango juice, brownie, cookie, etc. in a decorative container. 2. A new financial manager You have been brought in as the new financial manager of The Bake House. After talking with your supervisor, Mr. Rayyan, you decide that the pricing of the products needs to be reevaluated and updated. Mr. Rayyan is concerned that some product prices may be out of line when considering the cost to make each item. He emphasizes to you that setting fair prices based on the relative cost to produce each item is a priority to The Bake House because of its mission of serving students. You and Mr. Rayyan agree that relative prices for different products should be based on direct materials cost only, because other costs of manufacturing individual products (such as labor and overhead) would be difficult to determine. You also agree that other factors like competitor and customer characteristics should be kept in mind. Mr. Rayyan adds that you should, ?Remember in setting your prices that we are here to serve the students and not to generate a profit. I feel that a student should not have to pay more than RM1.50 for any regular single-serve item that we have on our menu. Of course, this does not apply to things like large and extra large cookies, cakes, and variety bags, which contain several items packaged in a decorative container. In addition, I am afraid if you raise the price of any item more than 25%, students will become upset and may stop coming to The Bake House. Finally, for ease of use, all prices should be rounded to 5-cent increments.? 3 3. Additional information 3.1. Costs Based on the information that Mr. Rayyan has provided, you decide that it is best to first determine the direct materials cost for each product sold by the Bake House. This information has been gathered and is provided in Table 2. Table 2. Direct materials cost and weekly demand Menu Item Direct Mat. Costs Avg. Weekly Demand 16 oz. Bottled juice RM0.60 46 Milk RM0.15 20 12 oz. Coffee RM0.13 9 l4 oz.Soft drink RM0.08 22 20 oz.Soft drink RM0.14 33 33 oz. Soft drink RM0.24 55 9?13? Cake RM1.33 6 18?13? Cake RM2.94 4 9? Round cake (2 layer) RM2.25 3 Large cookie RM0.50 4 Extra large cookie RM0.99 6 Classic baga RM1.44 2 Gourmet baga RM1.55 3 EeU baga RM1.66 4 Jumbo cinnamon roll RM0.22 35 Regular cinnamon roll RM0.09 41 Jumbo pecan roll RM0.48 21 Regular pecan roll RM0.24 25 Muffin RM0.10 152 Turnover RM0.12 32 Bagel RM0.30 40 Classic cookie RM0.05 96 Gourmet cookie RM0.11 261 Brownie RM0.35 68 Rice Crispy treat RM0.35 156 a These items are designed for gift-giving. They consist of several items, such as a bottled Minute Maid juice, brownie, cookie, etc. in a decorative container. Your next concern is the cost of labor and overhead needed to run the organization. The average weekly labor cost for all student employees is RM450. One student is available at all hours when the store is open. There is not enough space in the store for more than one person to work. Overhead consists of the costs of maintaining the area where The Bake House is 4 located (maintenance includes large items like painting and replacing countertops), The Bake House's share of utilities, janitorial, and other services. These costs, amounting to about RM40 per week, are determined based on a formula, but Mr. Rayyan indicates that he expects them to remain fairly constant as long as the size of The Bake House does not change. The cost of salaries for the civil service employees who prepare the baked goods is categorized as direct labor. While it might be possible to change these costs in the long run, Mr. Rayyan estimates that they will remain constant at RM200 per week as long as total revenues are in a normal range, which is from about RM800?1500. 3.2. Competition After thinking about the costs for The Bake House, you turn your thoughts to The Bake House's competitors. You should identify competitors for the Bake House, given the nature of its customers and products offered. Once identified, you should visit and evaluate these competitors to determine how the products and services they offer will influence the prices for The Bake House's products. 4. Customers and demand Most items at The Bake House are purchased by students. The average student at Excel e University is 22 years old, lives in a residence hall, and goes to school full time. There is one exception to this pattern. A few larger items?cakes, large cookies, and variety bags (Classic, Gourmet, and EeU bags)?are primarily bought over the phone and through the mail by parents to be delivered to their children for special occasions. Weekly demand data for The Bake House are provided in Table 2. These numbers were estimated by averaging weekly sales data for the past 12 months. 5. Requirements 1. Before beginning the assignment, think about how costs, constraints, competition, and customer characteristics should influence the prices of The Bake House's products and, consequently, how you should go about determining the prices. Be explicit for each item. Consider The Bake House's objective of fair pricing, as indicated by Mr. Rayyan, as well as the organization's non-profit status. 2. After you have completed requirement 1, create a spreadsheet to collect/compute necessary information to help in setting prices. Your spreadsheet should be designed so that changes can easily be made to costs, constraints, competitor prices, and weekly demand. It should allow the user to quickly see the effect of these changes on costbased prices and income. To accomplish this, the spreadsheet should have four individual worksheets. (a) The first worksheet, the input sheet, should be where all of the given information is entered - previous prices, costs, weekly demand, fixed costs for labor and overhead, and any other data you collect. (b) The second worksheet, the computations worksheet, should show computations for the markup percentage, initial prices based on markup, and any constraint-related 5 values. In addition to other necessary columns to show computations clearly and neatly, the computations worksheet should have a column showing the ?maximum price? for each of the products based on the various ?constraints? identified by you and Mr. Rayyan. The last column in the computations worksheet should allow the user to judgmentally select and enter the new menu price for each item by looking at information provided in the worksheet as well as other factors he or she wants to consider. At the bottom of the column, the total revenue, total cost, and net income resulting from the final prices should be shown so that the user can see the effect of price changes. Two worksheet functions will be useful to you as you build your spreadsheet: =sum(range1: range2) range1 and range2 are columns of values, for example, A1:A3 and B1:B3. The =sum function will multiply values in range1 by the corresponding values in range2, and then sum the products down the column (A1?B1+A2?B2+A3?B3). This function may be useful as you are computing total revenue and total cost. =mround(number, multiple) Number is a number or formula to be rounded. Multiple is the multiple to round to. Rounding is normally to the nearest multiple of 1, 10, .1 or .01, although mround can round to any multiple desired. For example, to round RM554.20 to the nearest 25-cent increment, use =mround(554.20,.25). The result will be 554.25. This function is useful for rounding the prices to 5-cent increments as required by Mr. Rayyan. (c) The final worksheets, the output worksheets, should present the price list and a contribution margin income statement in clearly readable form. The user should not have to do anything to produce the price list and the income statement. They should be automatically computed from the values entered on the first two worksheets. 3. Once you have completed your spreadsheet, use it as well as other information about customers and competition to arrive at prices for the products. Prepare a report for Mr. Rayyan describing how your spreadsheet works and the steps you used for setting prices, including a description of the role of costs, constraints, competition, and customers in motivating your decisions. Your report should not be more than two pages, single-spaced with 1-inch margins and a reasonable font size. In addition to the two-page report, you should include a printout of your pricing worksheets, price list, and income statement. 4. Assume that Mr. Rayyan has received your report and accompanying worksheets and is impressed. Mr. Rayyan was intrigued by the variable costing income statement you showed him. He has never seen an income statement where costs were divided into variable and fixed categories and thinks this might have some potential. He has asked you for recommendations for using this information. You remember an earlier conversation with Mr. Rayyan where he indicated that The Bake House's weekly sales are actually very erratic, depending not only on whether the semester is in session, but also on the time of the semester, with sales being much higher during times such as finals week. Mr. Rayyan was complaining at the time 6 that, while he can usually predict total sales for any given week based on past experience, this variability makes it tedious estimating the income/loss for the Bake House each week as required by housing and dining services. You also recall that Mr. Rayyan had once been very concerned when housing and dining services was going to dramatically increase the cost of overhead charged to The Bake House. He spent some time in his office computing the effect of a potential increase. Write a memorandum explaining to Mr. Rayyan the value of the variable costing income statement and describing how he can use information from your average weekly income statement to (1) develop a model and quickly predict income for any given week when an estimate of total sales is known, and (2) identify the effect of changes in factors such as total overhead cost on The Bake House's profitability. Bear in mind that Mr. Rayyan will not want to have to estimate total sales of each individual item to make predictions. Describe the assumptions that would have to be made for the model to result in accurate predictions. As you describe your model, include examples for Mr. Rayyan where you predict the income for a week where total sales are expected to be RM1500 and evaluate the effect of an increase in overhead costs to RM190. 5. Mr. Rayyan has decided he would like for you to use your spreadsheet to evaluate the effect of a possible change in the Bake House's operations that he has been considering. This change would involve having Hot & Tasty, a local bakery and coffee house; make the goods to be sold in The Bake House. Hot & Tasty has an excellent reputation and Mr. Rayyan believes that weekly demand for all of the products would increase by 25% if the baked goods were purchased instead of produced. Hot & Tasty would charge The Bake House 250% of the materials cost (materials costs are shown in Table 2) for the completed baked goods. Outsourcing the production of The Bake House items would not influence the amount of general overhead applied to The Bake House. Mr. Rayyan would like to know what effect this outsourcing decision would have on the prices that The Bake House must charge. Would the prices have to be increased, or could they be decreased? If a consistent percentage price adjustment were applied to all of the prices you computed in the previous step, what would the percent be? What other, possibly non-quantitative, factors should be considered when making the decision? Include with your answers copies of your new data entry and computation spreadsheets.",ok. thank you,as mention by my lecture in the school.. that there are no answers to the case of the bake house. it all depends on thassumptions you make and how you analyze the case..,please see the attached question

 

Paper#9653 | Written in 18-Jul-2015

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