The Judge's Best
Twelve months ago, Samson opened a coffee shop, The Judge's Best, in Grace Medical Village's former gift shop. Samson believed that he had the knowledge and understanding to make a success of this new business. He produced a quality product that people needed, priced the product to be very competitive, and selected a great location in a high-traffic area of the medical village.
Material Costs
The Judge's Best uses a specialty brand of Yirgacheffe1coffee beans costing $6.60 per pound. Each pound of coffee beans produces 256 ounces of coffee. Coffee is sold in three sizes: a small cup holding 8 ounces, a medium cup holding 10 ounces, and large cup holding 12 ounces.
The cups needed to serve the coffee cost $.06 for the small cup, $.07 for the medium cup, and $.08 for the large cup. Lids cost $.04 per cup and are the same regardless of the cup size. Sleeves cost an additional $.05 per cup. On average, sugar and cream cost $.03 per cup for small cups, $.04 for medium cups, and $.05 for large cups.
Labor Costs
The Judge's Best is open 12 hours each day, 7 days a week (365 days per year), and is staffed with three employees during the morning shift (7:00 a.m.-11:00 a.m.), two employees from 11:00 a.m. until 3:00 p.m., and three employees from 3:00 p.m. to 7:00 p.m. Labor is fixed cost, because the employees are paid regardless of whether coffee is sold. Samson worked 60 hours each week, on average, and was paid a salary of $42,000 during the first year of operations. Fringe benefits for Samson, including health insurance and payroll taxes, accounted for an additional $10,000 of costs for the company. Part-time employees worked an average of 24 hours each week and were paid $15.00 per hour. Payroll taxes and other costs $1.00 per hour for part-time employees. As shown in the following table, part-time employees worked from 656 hours to 727 hours each month:
Month Part-time Employee Month Part-time Employee
Labor Hours Labor Hours
January 722 July 727
February 656 August 727
March 727 September 705
April 705 October 727
May 727 November 705
June 705 December 727
Overhead Costs
During the first year of operations, the medical village charged rent of $2,000 per month. As part of the rental cost, the medical village provided furniture and fixtures for the shop, as well as nightly cleaning services. Samson leased a drip coffeemaker, refrigerator, coffee grinder, scale, and cash register for $150 per month, total. Samson paid directly for his utilities (electricity and water). The costs of electricity included the costs of heating and cooling the shop as well as the costs of running the electric appliances (refrigerator, coffeemaker, etc.).
For the first 12 months of operations, utility expenses were as follows:
Month Utility Expense
January $472
February $510
March $524
April $460
May $440
June $460
July $452
August $430
September $535
October $570
November $580
December $600
Total $6,033
Selling and Administrative Costs
Samson incurred $200 a month in accounting fees and spent $500 on various promotional and advertising materials during the year. He also paid $1,000 for liability insurance.
Sales Revenue
During the first year of operations, Samson set the shop's prices to be slightly lower than their competitors'. The Judge's Best sells a small cup of coffee for $1.75, a medium cup for $2.35, and large cup for $2.75. Sales revenue was as follows:
Month Sales in Cup of Coffee
January 9,300 Cups*
February 9,800
March 10,850
April 9,500
May 9,300
June 9,000
July 8,800
August 8,600
September 11,000
October 11,620
November 12,000
December 12,400
*Coffee sales average 10% small cups (8 ounces), 50% medium cups (10 ounces), and 40% large cups (12 ounces) (Sawyer et al., 2013).
Requirements
Part I
1. Calculate the cost of coffee beans per ounce of coffee sold.
2. Calculate the cost of cups, lids, sleeves, cream, and sugar per unit for small, medium, and large cups of coffee and in total.
3. Calculate the total labor costs for the year
4. Prepare an income statement for The Judge's Best for the last year. You can assume that there are no inventories on hand at the end of the year. (All coffee and supplies purchased during the year are consumed.)
5. Determined whether the costs incurred by The Judge's Best are fixed, variable (with respect to number of cups of coffee sold), or mixed.
Requirements Continue
Part II
6. Use regression analysis and the high/low method to calculate the monthly fixed cost and the variable component of the utility expenses incurred by The Judge's Best. Use cups of coffee sold as the independent variable and utility expense as the dependent variable in your regression analysis. After calculating both numbers, round your final answer to two decimal places.
7. Compare the regression results with the high/low results. Which model would you suggest?
8. Calculate the contribution margin earned for each product (round to three decimal places and the weighted-average contribution margin (round to four decimal places).
9. Assume the sales mix given in the problem. What is The Judge's Best's break-even point in terms of the number of cups of coffee sold during the year?
10. Samson is contemplating adding a new 20-ounce product for the coming year and discontinuing sales of the small 8-ounce cup. The new cup, lid, and sleeve cost the same as the 12-ounce cup, but cream and sugar is expected to cost $.06 per cup instead of $.05 per cup. The new extra-large cup would be priced at $3.30. Samson anticipates that the new sales mix would be 50% for the 10-ounce cup, 30% for the 12-ounce cup, and 20% for the new 20-ounce cup. Assume that material, labor, and overhead costs remain the same in the upcoming year. How would this change in sales mix affect the company's break-even point?
11. Samson would like to increase sales and provide superior customer service in the second year of operations so that he may raise his salary to $70,000 (not including $15,000 of fringe benefits) while reducing his workload to 40 hours per week with two paid weeks of vacation during the year. Reducing his workload will require increasing the number of hours worked by part-time employees by 1,080 hours per year. Assume the introduction of the extra-large cup and the new sales mix as discussed in requirement 10. What level of annual sales would be required in order for Samson to reach his increase in sales goal? What does his customer service goal suggest about a change in managerial accounting and control systems?
12. Write a two page analysis (i.e., executive summary) and discuss whether you think Samson will be able to reach his sales and service goals during the second year of operations (Remember, all written assignments must be in APA style [i.e., your analysis should include Title, Content, Appendix-depicting your computations, and Reference Pages]).