Sweet Bites Cakes (a fictional company) began operations in 2015 and uses natural and organic ingredients and unique flavor combinations in its product line. Bacon Bourbon Spice Cake, Chai Tea Cake, and Key Lime Avocado Cake are just a few of the cake flavors that the company sells.
Sweet Bites offers three main product lines:
• Singles, which are single-serving slices of cake that are ready to eat on a plate
• Six-inch cakes, which are pre-sliced and sold to distributors for food service applications or in grocery store bakeries
• Ten-inch cakes, which must be sold in refrigerated cases with custom labels. The cakes are available in a variety pack, in a duo-pack (two different flavors), or as a full cake.
By 2017, the demand for Sweet Bites Cakes grew to a national market thanks to the company’s Instagram and Facebook accounts. This year, the company landed a large grocery chain contract. In 2017, the company had $6.1 million in sales revenue and is on track to do $9.3 million in sales this year.
The plant currently has the capacity to do $1 million in sales per month, but with an additional investment of $500,000 in ovens, mixers, and workstations, Sweet Bites Cakes could increase capacity to $1.5 million. The months of October through December tend to yield higher sales volume as a result of the holidays. Sweet Bites realizes roughly 60% of its business during this period.
Sweet Bites employs eight salaried workers and 50 hourly employees. The employee pay rate is from $12.50 to $16.50 per hour for 8 hours per day. Sweet Bites determines its labor costs based on 8 hours per day, the expected number of workdays per month, and the total projected hours for the month. The hours are multiplied by the total projected hours for the month to determine the expected monthly gross pay amount for each hourly employee based on a 40-hour workweek. The sum of the expected hourly employee gross monthly pay is added to the salaried production worker’s gross monthly pay, and the projected total payroll-added costs such as Social Security, employer taxes, etc., comprise the total labor dollars for the month. Sweet Bites likes to keep this number as close to 20% of sales as possible and adjusts labor hours accordingly.
The company bases pricing decisions on cost, consumers, and competition. It wants to achieve a target 17% gross profit margin (or higher) on cost with pricing being the most important factor. The following table provides selected actual cost and revenue data for May 2019.
Cost Category Behavior May 2019
Sales $766,667
Expenses:
Raw Materials Variable $327,934
Bakery Labor Mixed $158,767
Administration Salaries Fixed $ 41,367
Supplies Variable $ 3,833
Freight & Shipping – In Variable $ 4,907
Freight & Shipping – Out Variable $ 64,707
Utilities – Electricity Variable $ 9,813
Utilities – Gas (Ovens) Variable $ 3,067
Utilities – Water Variable $ 920
Repairs & Maintenance Fixed $ 4,293
Rent Expense Fixed $ 19,167
Telephone & Internet Fixed $ 2,300
Co-Owners’ Salary Fixed $ 25,300
Brokers’ Commissions Variable $ 30,667
Total Expenses $697,042
Operating Profit $ 69,625
Income Tax $ 22,280
Net Operating Income $ 47,345
Unit Volume 64,500
Average Operating Assets $5,500,000
Minimum Rate of Return 8.00%
Raw Materials: Includes main ingredients and flavor additives. Main ingredients are relatively higher-cost items such as flour, sugar, eggs, nuts, and fruit that appear on the package label. Flavor additives are relatively low-dollar cost items and a small part of the weight of the cake such as spices, dyes, salt, and certain oils that don’t always appear on the package label.
Bakery Labor: The cost amount consists of 22% supervisory salaries and taxes, and the rest are hourly workers. Bakery labor workers are organized into four categories: production line (mixing, filling, and baking), packaging, sanitation, and warehouse (all included as part of cost of goods sold).
Administration Salaries: Include taxes and benefits for the Vice President of Operations, Controller, Human Resource Manager, and two administrative support people.
Supplies: Includes supplies relating to production, packaging and decorating, sanitation, and warehouse. Freight & Shipping – In: The cost of shipping raw ingredients and other materials to the factory from suppliers.
Freight & Shipping – Out: The costs of shipping finished products to customer locations and distribution centers.
Utilities – Electricity: Approximately 10% for administrative office and the remainder for the factory. The factory portion varies somewhat with production volume.
Utilities – Gas: Approximately 5% for administrative office and the remainder for the factory. The factory portion varies somewhat with production volume.
Utilities – Water: All for the factory and varies proportionately with production volume. Repairs & Maintenance: All for the factory.
Rent expense: The factory uses about 85% of the total square footage of the building, and the remainder is for the administrative office.
Telephone & Internet: All for the administrative office. Co-Owners’ Salary: Two owners.
Broker’s Commissions: Generally 4% of sales. Income Tax: Average total tax rate is 32%.
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