Question

Joe has opened a milk shake stand at Scottsdale Fashion Square. It has proven quite popular amongst shoppers and sales have continued to grow. As sales have grown, Joe has found that his profit margin has declined. Concerned about this he has hired you to review his financial results Exhibit 1 - Recipe and cost of goods Joe produced one type of milk shake - chocolate - and in one size. The inputs and cost are below: Per Shake Units Cost Units Whole Milk $15 640 oz 2 oz $20 128 oz Cream 2 oz $10 30 cups $24 600 oz Sugar 0.5 cups 6 oz Ice Cream $200 500 cups Cup 1 cup Joe pays $5,000 a month in rent. He uses a fixed staffing of 20 hours per day and his labor cost including taxes and benefits is $20 per hour. Joe also spends $2,000 a month in advertising. Last month Joe had the following results in a 30 day month Joe's Shakes Jun-19 $4.50 Price per Shake Shakes Sold 10,000 Labor 12,000 Milk 586 Cups 3,000 Rent 5,000 Sugar 14,500 Cream 3,125 Advertising 2,000 Ice Cream 2,300 $2,489 Profit Sorry for the bad format Joe isn't an accountant that's why he hired you!

Answer 1

1. a. Here's the flexible budget:

Fliexible Budget of Joe
Units Sold (chocolate Shake)	10000
Description	Price Per shake		Amount ($)
Sales Revenue		4.50	45,000.00
Less: Cost of Goods Sold (COGS)
Direct Material
Whole Milk ($ 15 for 640 oz; so (15/640*2) per shake)	0.05		468.75
Cream ($ 20 for 128 oz; so (20/128*2) per shake)	0.31		3,125.00
Sugar ($ 10 for 30 cups; so (10/30*0.5) per shake)	0.17		1,666.67
Icecream ($ 24 for 600 oz; so (24/600*6) per shake)	0.24		2,400.00
cup ($ 200 for 500 cups; so (200/500*1) per shake)	0.40		4,000.00
Direct Labor (20 hours @ $20 per hour for 30 days)		1.20	12,000.00
Total Cost of Goods Sold			23,660.42
Gross Profit (sales less COGS)			21,339.58
Less: Fixed or Administrative Cost
Rent	5,000.00
Advertising	2,000.00
Total Fixed Costs			7,000.00
Net Profit / (Loss) (rounded off to 0 decimal places)			14,340.00

Budget vs Actual comparison:

Budget vs Actuals
Units Sold (chocolate Shake)	10000
Description	Budgeted Amount ($)	Actual Amount ($)	Variance ($)
Sales Revenue	45,000.00	45,000.00	-	N/A
Less: Cost of Goods Sold (COGS)
Direct Material
Whole Milk ($ 15 for 640 oz; so (15/640*2) per shake)	468.75	586.00	117.25
Cream ($ 20 for 128 oz; so (20/128*2) per shake)	3,125.00	3,125.00	-
Sugar ($ 10 for 30 cups; so (10/30*0.5) per shake)	1,666.67	14,500.00	12,833.33
Icecream ($ 24 for 600 oz; so (24/600*6) per shake)	2,400.00	2,300.00	(100.00)
cup ($ 200 for 500 cups; so (200/500*1) per shake)	4,000.00	3,000.00	(1,000.00)
Direct Labor (20 hours @ $20 per hour for 30 days)	12,000.00	12,000.00	-
Total Cost of Goods Sold	23,660.42	35,511.00	11,850.58	Unfavourable
Gross Profit (sales less COGS)	21,339.58	9,489.00	(11,850.58)	Unfavourable
Less: Fixed or Administrative Cost
Rent	5,000.00	5,000.00	-
Advertising	2,000.00	2,000.00	-
Total Fixed Costs	7,000.00	7,000.00	-	N/A
Net Profit / (Loss) (rounded off to 0 decimal places)	14,340.00	2,489.00	(11,851.00)	Unfavourable

Its not the cups; but actual cost is more, because of more consumption of Sugar. Joe has to investigate on this part to know the reason for increased consumption of sugar as compared to the required quantity.

b. Budget for 15000 milkshakes @ $ 4 per shake and additional advertising cost:

Flexible Budget of Joe
Units Sold (chocolate Shake)	15000
Description	Price Per shake		Amount ($)
Sales Revenue		4.00	60,000.00
Less: Cost of Goods Sold (COGS)
Direct Material
Whole Milk ($ 15 for 640 oz; so (15/640*2) per shake)	0.05		703.13
Cream ($ 20 for 128 oz; so (20/128*2) per shake)	0.31		4,687.50
Sugar ($ 10 for 30 cups; so (10/30*0.5) per shake)	0.17		2,500.00
Icecream ($ 24 for 600 oz; so (24/600*6) per shake)	0.24		3,600.00
cup ($ 200 for 500 cups; so (200/500*1) per shake)	0.40		6,000.00
Direct Labor (20 hours @ $20 per hour for 30 days)		1.20	18,000.00
Total Cost of Goods Sold			35,490.63
Gross Profit (sales less COGS)			24,509.38
Less: Fixed or Administrative Cost
Rent	5,000.00
Advertising	3,000.00
Total Fixed Costs			8,000.00
Net Profit / (Loss) (rounded off to 0 decimal places)			16,509.00

C. Highest Variance is because of Sugar Consumption. Sugar gets dissolve easily when used with wet hands. Hence consumption may be more as compared to required. Joe may look out for an option where Sugar is kept away from other liquid ingredients and sugar consumption is possible without getting wet by using specially designed bottles or longer spoon. Other option, since Cup consumption is less, one cup can be used separately to keep sugar separately from whole lot for few shakes, by which Sugar will not get wet and consumption can be less.

2. # of units to produce desired profit = (Desired profit in $ divided by Contribution Margin per unit)+(fixed cost divided by Contribution margin per unit)

Desired profit = $ 10000

Fixed Cost = Rent of $ 10,000 + Advertising of $ 2000 = $ 12,000

Contribution Margin per unit = Revenue per unit less Direct Material per unit less Direct Labor per unit

= 4.5 - 2.37-1.2

= 2.13

# of units to produce desired profit = (10,000/2.13) + (12000/2.13)

= 10,320 units (rounded off to 0 decimal places)

Thus, 10,320 units to be sold to get desired profit.

To check,

To check for desired profit
Units Sold (chocolate Shake)	10320
Description	Price Per shake		Amount ($)
Sales Revenue		4.50	46,440.00
Less: Cost of Goods Sold (COGS)
Direct Material
Whole Milk ($ 15 for 640 oz; so (15/640*2) per shake)	0.05		483.75
Cream ($ 20 for 128 oz; so (20/128*2) per shake)	0.31		3,225.00
Sugar ($ 10 for 30 cups; so (10/30*0.5) per shake)	0.17		1,720.00
Icecream ($ 24 for 600 oz; so (24/600*6) per shake)	0.24		2,476.80
cup ($ 200 for 500 cups; so (200/500*1) per shake)	0.40		4,128.00
Direct Labor (20 hours @ $20 per hour for 30 days)		1.20	12,384.00
Total Cost of Goods Sold			24,417.55
Gross Profit (sales less COGS)			22,022.45
Less: Fixed or Administrative Cost
Rent	10,000.00
Advertising	2,000.00
Total Fixed Costs			12,000.00
Net Profit / (Loss) (rounded off to 0 decimal places)			10,022.00