Frenchies is a medium-sized regional bakery that specializes in providing orders to grocery and convenience stores. In
Question:
Frenchies is a medium-sized regional bakery that specializes in providing orders to grocery and convenience stores. In order to maintain its high quality standard, Frenchies produces only three products: breakfast muffins, fresh bread, and chocolate chip cookies. Although business has been good in the past few years, a lucky contact with a large chain has recently allowed it to expand its brand out of the local region.
Walking down the hallway towards the office of Jeff Barza, the sales manager, Nicole read the results for last quarter which ended on December 31, 2018. Frenchies sold 45,000 one-dozen packages of muffins for $5.50 each, 65,000 one-dozen packages of cookies for $4.75 each, and 85,000 one-dozen loaves of bread for $5.25 each. When Nicole got to Jeff’s office, he motioned her in to have a seat.
“Is it time for our meeting already?” he asked. “Where does the day go?”
“Well, Andy thinks that since we have established a strong following both locally and in our new markets, we can raise our prices slightly next year without a sharp drop in sales. He was thinking $6.00 for muffins, $5.25 for cookies, and $5.75 for bread. What do you think?”
drop would only be about 10 percent.” bakery. Our price is a little more elastic than dairy products. Besides, 20 percent is a more conservative estimate and in the past we wanted no surprises.” He looked at her and challenged, “Are you going to change that?” “I guess so. But, my bonus is tied to how well I meet my estimates. If we estimate low results and then go up . . .” Seeing the look on her face, he quickly changed direction. “Besides, Nicole, we are raising the prices. A 10 percent drop is normal after Christmas, but couple that with the increased prices, and 20 percent is reasonable.” Okay, Jeff. I’ll take your word for it. We’ll use 20 percent. After all, you’re the expert.” ““After that, I think sales will grow steadily at about 5 percent a quarter with these new prices. Fourth-quarter sales will be high because of the holidays— let’s say 20 percent, instead of 5 percent, from the third to the fourth quarter. The first quarter of the following year will continue the 5 percent growth as though the holiday jump didn’t occur. And I’m not messing with those estimates. The information I have from last year says that we make about 10 percent of our sales through our café and that we don’t sell to those customers on credit.” Jeff smiled. “Yep, but we do sell on credit to the business customers. If we didn’t, they’d definitely go somewhere else. So, we give our business customers a lot of leeway in paying us. It makes it a little hard on us, but it keeps them loyal. Anyway, we collect 30 percent of the credit sales within the current quarter, 45 percent in the following quarter, and 25 percent in the quarter after that. “Then I have only two more questions. What were total sales during the third and fourth quarters of last year, and are we still collecting any of that money?” Jeff pulled up a file. “Total sales were $802,000 and $1,002,500, respectively, and we are still collecting quite a bit of that money based on our collection breakdown.” MEETING WITH THE PRODUCTION DEPARTMENT |
“Okay and you make your estimates based on a 90-day quarter?” days we have to produce a lot to meet our orders, so I normally try to keep 15 percent of the next quarter’s raw materials on hand at all times.” “But, I can tell you that one of my mixers can mix together either 12 dozen cookies, 8 dozen muffins, or “Yep. I try to keep things as standard as possible. The packaging department is the slowest. They have to double wrap the cookies and muffins—once to keep them fresh and once in the fancy packages marketing came up with—so it takes 15 minutes to package either two one-dozen packages of cookies or two one-dozen packages of muffins. The bread is a little faster. In 15 minutes we can package about eight dozen loaves of bread.” |
Phil grabbed a piece of paper. “We pay the mixers $7.50 an hour, the bakers $8.00 an hour, and the packers $6.50 an hour.” MEETING WITH THE ACCOUNTING DEPARTMENT “That’s me,” Bob said. “Most of our vendors require that we pay for everything within 30 days of making our purchase. That means that 85 percent of our purchases are paid for within the quarter they are made. And, before you ask, we ordered $210,984 worth of inventory during the last quarter last year, so we still owe 15 percent of that, or $31,648.” “Sure,” Sarah said. “Last year we allocated variable overhead at $1.50 for each direct labor hour. This year, I think that we’re going to need to increase that to $2.00 to cover increases in security fees, utility rates, and energy prices. We also spend about $160,000 a quarter in fixed overhead. Also, don’t forget that we usually use total direct labor hours to calculate a predetermined overhead rate when calculating the unit cost.” |
Exhibit 2 S&A Expense Advertising, Cleaning supplies Janitorial service, Office staff salaries Office supplies, Rent – Office, Sales salaries, Top management salar Utilities – Office Cost / quarter $40,000 1,000 6,000 25,000 3,000 9,000 35,000 80,000 1,800 $200,800 “Well, at the end of last year, we secured a $1,109,969 mortgage at 6 percent interest. Our payment each quarter is $20,000. Since it’s a mortgage, the calculations are kind of fun. Each payment requires us to pay a bunch of interest and a little bit of principal. To break up the $20,000 into the two parts, we have to multiply the current mortgage value by 6 percent and divide by 4. . .” Divide by 4?” asked Bob. “Well, yeah, 6 percent is the annual rate. Since we make quarterly payments, we divide the annual rate by 4.” “Right. So, our first payment will be made at the end of the upcoming quarter. We’ll end up paying $16,650 as interest and $3,350 in principal. This means that the value of the mortgage in the second quarter will be $1,106,619. That’s the original $1,109,969 minus the $3,350, Bob.” |
“I appreciate it, too,” Nicole said. “If I remember right, we have to pay the $20,000 each quarter. Our contract prohibits us from paying any additional principal for the first three years.” “It sure has,” Bob responded, rifling through a tax folder. “Our corporate tax rate is 30 percent and a portion of our estimated taxes must be paid each quarter to avoid late fees. Our policy is to pay 110 percent of the taxes that we owed last year over the course of the current year. Since we paid $15,000 last year, we will need to pay $16,500 this year.” “And we’ll pay that equally over the four quarters?” “Right. At the end of the year, we calculate our actual taxes owed as 30 percent of net income. MEETING WITH THE CEO “First, I just want to confirm a couple of things from some earlier meetings. You told me a couple of weeks ago that the board of directors now wants us to have $40,000 worth of cash on hand at all times and to pay $25,000 in dividends each quarter. Is that still the plan?” “Yes it is. I think it’s a little restrictive myself, but sometimes we have to do as we’re told. Because of the expansion, though, we are going to have to issue another 50,000 shares of common stock to the venture capital firm in the first week of the third quarter. We won’t plan on changing our dividend payment schedule this year, but we will probably have to increase the amount we pay in future years. For now, though, the big factor is the capital infusion of $400,000 we’ll get from selling our stock.” |
Case Data | |||||||||
Sales Information: | |||||||||
Estimated % drop: | 20% | Estimated Growth: | 5% | Estimated Additional Holiday Increase: | 15% | ||||
Sales: | Muffins | Cookies | Bread | ||||||
Last Year | |||||||||
Q4 | 45,000 | 65,000 | 85,000 | ||||||
Current Year | |||||||||
Q1 | |||||||||
Q2 | |||||||||
Q3 | |||||||||
Q4 | |||||||||
Next Year | |||||||||
Q1 | |||||||||
Q2 | |||||||||
Sales Price/Item: | $6.00 | $5.25 | $5.75 | ||||||
Collection Information: |
Collections in Quarter | Total | ||||||
Q1 | Q2 | Q3 | Q4 | 2020 | |||
Collections from last year | |||||||
Q1 | Sales | ||||||
Q2 | Sales | ||||||
Q3 | Sales | ||||||
Q4 | Sales | ||||||
Total Cash Collections | $0 | $0 | $0 | $0 | $0 | ||
Production Budget | |||||||
Muffins | Q1 | Q2 | Q3 | Q4 | Total | ||
Sales | |||||||
Add ending inventory | |||||||
Less beginning inventory | |||||||
Required production | |||||||
Intermediate Accounting
ISBN: 9781259722660
9th Edition
Authors: J. David Spiceland, James Sepe, Mark Nelson, Wayne Thomas