6205 Managerial Accounting-Cost Volume Profit Analysis Case
6205 Managerial Accounting Fall 2015Cost Volume Profit Analysis CaseGrace’s Chocolates CompanyYou are a consultant with Cox Consultancy. You have a client, Grace that has hired youto advise her on some production decisions relating to her chocolate business andcompensation schemes relating to her ice-cream maker business.Grace’s Chocolate Company (GCC) is a very small scale producer of fine chocolateslocated in central Connecticut which operates primarily around the Holiday season.GCC also sells home ice cream makers all year round.Assume the following information about the cholate businessGrace’s entire annual production takes place over a single weekend in early December,during which a maximum of 3,000 chocolates can be produced and packaged into boxesof thirty chocolates each. For purposes of this problem, assume that all chocolates haveidentical costs.Currently, Grace produces 2,400 chocolates during the weekend. Variable costs consistof chocolate and boxes. The cost of other direct materials (such as peanut butter, oils,nonpareils, etc., are considered insignificant, and thus ignored). All other costs,including facilities, overhead, and labor, are considered fixed costs. Each box can besold for $4. Ignore taxes throughout the problem.Cost to produce 2,400 chocolatesVariable CostsFixed CostsTotal Cost32 pounds of chocolate @ $5/pound80 boxes @ $0.50/box$16040200$400Over the past several years, Grace has received numerous customer requests forspecialized boxes, containing only a single type of chocolate (Grace’s peanut butter cupsare especially popular). Grace is therefore considering offering specialized boxes as anew product line. While the chocolates themselves would be the same as before, theywould be packaged in a smaller box, costing $0.20 each. The smaller box would holdtwelve chocolates, and be sold for $2 per box. Adding the new product line would haveno effect on existing costs, including the fixed costs.16205 Managerial Accounting Fall 2015GCC also sells two models of home ice cream makers, Mister Ice Cream and Cold King.Current sales total 60,000 units, consisting of 21,000 Mister Ice Cream units and 39,000Cold King units. Selling price and variable cost information follows.Mister Ice CreamSelling price ……………………………………………………. $ 37.00Variable cost ……………………………………………………. 20.50Cold King$ 43.0032.50Salespeople currently receive flat salaries that total $ 200,000. Grace is contemplating achange to a compensation plan that is based on commissions in an effort to boost thecompany’s presence in the marketplace.Two plans are under consideration:Plan A: 10% commission computed on gross dollar sales. Mister Ice Cream sales areanticipated to be 19,500 units. Cold King sales are expected to total 45,500 units.Plan B: 30% commission computed on the basis of production contribution margins.Mister Ice Cream sales are expected to total 39,000 units. Cold King sales are anticipatedto be 26,000 units.Grace is contemplating various decisions relating to her two business and needs yourexpert advice. Consider the two businesses independent of each other.Chocolate business1. What is GCC’s breakeven point (in number of boxes)? Hint: It is not feasible.2. Assuming that GCC completely shifted over to producing specialty boxes, andthat they produced as many as possible, how much profit would GCC earn?3. If GCC were to produce a mixture of both regular and specialty boxes, what isthe smallest number of specialty boxes which would need to be produced inorder to break-even? Assume that total production is at the maximum of 3,000chocolates, and that GCC can sell whatever is produced.4. Currently, Grace pays her only employee a fixed salary of $120 for the weekend.She is considering changing this to a per chocolate piece rate of $0.05/chocolate.Assuming that GCC faces future uncertainty about volume, what would be oneadvantage and one disadvantage of paying a piece rate, in terms of GCC’s futureprofitability (assume that operationally, this would have no effect). Look at thisstrictly from the firm’s perspective. Answer qualitatively and briefly (3-4sentences).26205 Managerial Accounting Fall 2015Ice-cream maker businessWhat is your advice to Grace? Which compensation scheme should they implement?While reaching the overall conclusion, answer these specific questions.5. Comparing Plan A to the current compensation arrangement:a. Will Plan A achieve management’s objective of an increased presence inthe marketplace? Briefly explain.b. From a sales- mix perspective, will the salespeople be promoting theproduct that one would logically expect? Briefly discuss.c. Will the sales force likely be satisfied with the results of Plan A? Why?d. Will Grace likely be satisfied with the resulting impact of Plan A oncompany profitability? Why?6. Assume that Plan B is under consideration.a. Compare Plan A and Plan B with respect to total units sold and the salesmix. Comment on the results.b. In comparison with flat salaries, is Plan B more attractive to the salesforce? To the company? Show calculations to support your answers.3
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