Mia Violetta, after graduating from university took a one-week vacation on Hawaii. Starting from the spiritual beauty of the hula, over the emerald valleys and golden sands to the visceral power of an active volcano, Hawaii can be called the most magnificent place on Earth. During her time on Hawaii, she started thinking about opening up her own business there. She noticed that people on the beach are always dirking something, as the weather is tropically warm throughout the year. While returning home from her vacation, she started thinking about opening up a milkshake stand on the beach of a resort in Hawaii.
She studied the existing restaurants, read industry reports, and did some research on expected minimum costs to be incurred in operating the business. A unique feature of her milkshake is that she will serve them with flavored straws that match the flavor of the chosen milkshakes by customers. Mia’s research embeds the following assumptions:
Sales prices of per cup of milk shake $8.00.
Cost of materials needed to make milkshakes:
|Direct material ingredients||1 cup of milkshake (8 oz. size)|
|Whole Milk ($15 for a 5 gallon=740 oz.)||(need 2 oz. of milk)|
|Cream ($20 for 1 gallon=128 oz.)||(need 2 oz. of cream)|
|Sugar ($10 for a 15 lb. bag=30 cups)||(need ½ cup of sugar)|
|Premium Vanilla Ice Cream ($24 for 600 oz.)||(need 6 oz.)|
|Flavorings||.25 per shake|
|Flavored specialty straws||.75 per straw|
|Cups (500 8 oz. cups @ total cost of $200)|
Employees for Kitchen:
Mia has two employees working inside the kitchen, who will be paid solely on how many milkshakes they make every day. These workers will be paid $1 per milkshake they make.
List of Fixed costs for the Kitchen and the Milkshake stand:
- For the Milkshake stand on the beach (where ultimately the products will be sold) Mia will have to pay rental $500 per month.
- Mia wants to keep the kitchen clean. For which she plans to spend $100 a month for Cleaning
- Equipments for Kitchen and the Milkshake stand:
Mia needs to buy Industrial Milk Shaker and a freezer for the kitchen. Also, she needs Tables, benches, and countertops for the milkshake stand on the beach.
Cost of Industrial Milk Shake Maker: $72 per machine x 10 machines=$720
Cost of one Industrial Refrigerator/freezer: $480
Cost of Countertops: $1,200
Cost of Tables and benches for customers to sit outside: $108 per bench-set x 10=$1,080
- Annual insurance: $600 a year
The milkshake makers, tables and benches are assumed to last for 3 years. The refrigerator and countertops are assumed to last for 10 years.
Employees for Milkshake Stand:
Besides these workers working inside the kitchen, Mia is thinking about appointing two more employees who will be only in charge of selling the milkshakes on the milkshake stand on the beach. These two employees will be receiving a monthly salary of $800 per month and also a commission of $.50 per milkshakes they sell.
REQUIREMENTS OF THE CASE
- Calculate the monthly fixed manufacturing overhead cost for the kitchen.
- Calculate the monthly fixed selling and administrative cost for the milkshake stand.
- Calculate the per unit variable cost of production.
- Calculate the per unit variable selling and administrative cost.
- Using the above information, determine the number of milkshakes you will need to sell to break even in year 01. In order to do this, you will need to classify the above costs into fixed or variable. (Hint: keep all fixed costs on monthly basis throughout your analysis).
- Now consider that its year 02, and the owner Mia from now on will take fixed monthly salary of $200. Calculate the new fixed cost per month of the company and determine the number of milkshakes you will need to sell to break even.
- In year 02, Mia has set her goal to sell 800 units in the first month of operation. Calculate the margin of safety of this business. Explain what you understand by margin of safety and interpret the result you’ve obtained.
- Consider the following information for year 02. Prepare two income statements using bothvariable costing and absorption costing for the month of June.
May June Beginning units 50 150 Units produced 900 800 Units sold 800 825 Ending inventory 150 125
- Reconcile the NOI calculated under variable costing and absorption costing, for the month of June.
- If units produced exceeds units sold, which method (variable costing/ absorption costing) would you expect to show the higher NOI? Why?