Question

Cheryl Sounders, the owner of Abruzzi, is currently developing a budget spreadsheet to explore the impact of various sales goals on production. In 2011, the company had monthly sales as follows:
Month Sales (gallons)
January .......... 9,400
February ........ 9,200
March ......... 9,000
April ........... 8,800
May ........... 8,100
June ........... 8,500
July ........... 8,800
August ........ 8,500
September ....... 9,000
October ........ 9,300
November ....... 9,200
December ....... 9,600
At a planning meeting in November 2011, Jay Peters, the marketing manager for Abruzzi, told Cheryl that he expected monthly sales to increase by 5 to 15 percent in the coming year. But in late December 2011, Jay rushed into Cheryl’s office with some good news.“Cheryl, I just had a meeting with Consolidated Restaurants, and they’re considering an order for 1,500 gallons each month for all of 2012.” “Gosh,” Cheryl replied, “that’s an exciting bit of news, but I’m concerned about whether we have the capacity to accept such a large order. I’ll prepare budgets assuming we don’t get the Consolidated business but we increase monthly sales by 5, 10, or 15 percent. Then I’ll assume the Consolidated order comes through, and on top of that we have monthly sales increases of 5, 10, and 15 percent. This should give us a good idea of whether we’ll bump up against capacity.”Jay thought that this sounded fine, but he wondered whether Cheryl had the time to do this much work. Cheryl indicated that the analysis was relatively easy since she was preparing the budget on a spreadsheet and each analysis would require only a simple change.

Required
a. Using a spreadsheet, prepare the six monthly budget schedules that Cheryl suggested (i.e., monthly budgets with and without the Consolidated business assuming other sales increases of 5,10,and 15 percent).As a general rule, Cheryl likes to have ending inventory equal to 15 percent of next month’s sales. Assume that the company ended 2011 with an inventory of 1,400 gallons of olive oil. In order to calculate ending inventory at the end of December 2012, assume that sales in January 2013 will be the same as December 2012 sales.
b. Suppose that capacity is 12,000 gallons. ...Is the company likely to encounter a capacity problem?
c. Abruzzi sells its oil for $25 per gallon. The variable cost per gallon is $10.What will be the annual impact on profit of obtaining the Consolidated business (assuming there is no capacity problem)?



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  • CreatedSeptember 23, 2013
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