Appendix B: The Daily Grind1 Twelve months ago, David opened a coffee shop, The

Question

Appendix B: The Daily Grind1 Twelve months ago, David opened a coffee shop, The Daily Grind, in Mercy Hospital's former gift shop. David was confident that he had the knowledge to make a success of this new business. He produced a quality product that people needed, had priced the product to be very competitive, and had a great location in a high-traffic area of the hospital. Material Costs The Daily Grind uses a specialty brand of Kona coffee beans costing $8 per pound. Each pound of coffee beans produces 256 ounces of coffee. Coffee is sold in three sizes: a small cup holding 8 ounces, a medium cup holding 12 ounces, and a large cup holding 16 ounces. The cups needed to serve the coffee cost $.05 for the small cup, $.06 for the medium cup, and $.07 for the large cup. Lids cost $.03 per cup and are the same regardless of cup size. Sleeves cost an additional $.04 per cup. On average, sugar and cream cost $.02 per cup for small cups, $.03 for medium cups, and $.04 for large cups. Labor Costs The Daily Grind is open 12 hours each day, 7 days a week (365 days per year), and is staffed with three employees during the morning shift (7:00-11:00), two employees from 11:00 until 3:00, and three employees from 3:00 to 7:00. Labor is a fixed cost, because the employees are paid regardless of whether coffee is sold. David worked 60 hours each week, on average, and was paid a salary of $30,000 during the first year of operations. Fringe benefits for David, including health insurance and payroll taxes, accounted for an additional $10,000 of costs for the company. Part-time employees work an average of 24 hours each week and are paid $9 per hour. Payroll taxes and other costs average about $1.00 per hour for part-time employees. As shown in the following table, part-time employees worked from 656 hours to 727 hours each month: Month Part-time Employee Labor Hours January 722 hours February 656 hours March 727 hours April 705 hours May 727 hours June 705 hours July 727 hours August 727 hours September 705 hours October 727 hours November 705 hours December 727 hours View PDF Overhead Costs During the first year of operations, the hospital charged rent of $2,000 per month. As part of the rental cost, the hospital provided furniture and fixtures for the shop, as well as nightly cleaning services. David leased a drip coffeemaker, refrigerator, coffee grinder, scale, and cash register for $150 per month, total. David paid directly for his utilities (electricity and water). The costs of electricity include the costs of heating and cooling the shop. as well as the cost of running the electric appliances (refrigerator, coffeemaker, etc.). Back to Top View PDF P. 309 Click here to add Bookmark For the first 12 months of operations, utility expenses were as follows: Appendix B: The Daily Grind1 View PDF Selling and Administrative Costs David incurred $200 a month in accounting fees and spent $500 on various promotional and advertising materials during the year. He also paid $1,000 for liability insurance. Sales Revenue During the first year of operations, David set the shop's prices to be slightly lower than their competitors'. The Daily Grind sells a small cup of coffee for $1.25, a medium cup for $1.65, and a large cup for $1.95. Sales revenue was as follows: Month Sales in Cups of Coffee *Coffee sales average 10% small cups (8 ounces), 50% medium cups (12 ounces), and 40% large cups (16 ounces). January 9,300 cups* February 9,800 March 10,850 April 9,500 May 9,300 June 9,000 July 8,800 August 8,600 September 11,000 October 11,620 November 12,000 December 12,400 View PDF Requirements 1. Calculate the cost of coffee beans per ounce of coffee sold. 2. Calculate the cost of cups, lids, sleeves, cream, and sugar per unit for small, medium, and large cups of coffee and in total. 3. Calculate the total labor costs for the year. 4. Prepare an income statement for The Daily Grind for the last year. You can assume that there are no inventories on hand at the end of the year. (All coffee and supplies purchased during the year are consumed.) 5. Determine whether the costs incurred by The Daily Grind are fixed, variable (with respect to number of cups of coffee sold), or mixed. 6. Use regression analysis and the high/low method to calculate the monthly fixed cost and the variable component of the utility expenses incurred by The Daily Grind. Use cups of coffee sold as the independent variable and utility expense as the dependent variable in your regression analysis. After calculating both numbers, round your final answers to two decimal places. 7. Compare the regression results with the high/low results. Which model would you suggest? 8. Calculate the contribution margin earned for each product (round to three decimal places) and the weighted-average contribution margin (round to four decimal places). 9. Assume the sales mix given in the problem. What is Daily Grind's break-even point in terms of the number of cups of coffee sold during the year? 10. David is contemplating adding a new 20-ounce product for the coming year and discontinuing sales of the small 8-ounce cup. The new cup, lid, and sleeve cost the same as the 16-ounce cup, but cream and sugar is expected to cost $.06 per cup instead of $.04 per cup. The new extra-large cup would be priced at $2.40. David anticipates that the new sales mix would be 50% for the 12-ounce cup, 30% for the 16-ounce cup, and 20% for the new 20-ounce cup. Assume that material, labor, and overhead costs remain the Back to Top View PDF P. 310 Click here to add Bookmark same in the upcoming year. How would this change in sales mix affect the company's breakeven point? 11. David would like to increase sales in the second year of operations so that he may raise his salary to $50,000 (not including $15,000 of fringe benefits) while reducing his workload to 40 hours per week with two paid weeks of vacation during the year. Reducing his workload will require increasing the number of hours worked by parttime employees by 1,080 hours per year. Assume the introduction of the extra-large cup and the new sales mix as discussed in requirement 10. What level of annual sales would be required in order for David to reach his goal? 12. Write a short memo to David and discuss whether you think he will be able to reach his goal during the second year of operations.

Explanation / Answer

The Daily Grind - 12 month ago Material Cost - Kona coffee beans $8.00 per pound 1 pound of coffee beans produces 256 ounce of coffee Cost of coffee per ounce of coffee sold $0.03 Products variant Small medium large Quantity in Ounce per cup 8 12 16 Cost of Kona Cofee beans per cup ofr each variant 0.25 0.375 0.5 Coffe cost 0.05 0.06 0.07 Lid cost 0.03 0.03 0.03 Slevees 0.04 0.04 0.04 Sugar & Cream 0.02 0.03 0.04 Total material cost per cup 0.39 0.535 0.68 Toatl numbers of cups sold annully 12217 61085 48868 4764.63 32680.475 33230.24 Labour cost Labour cost of david 60 hrs each week Total Numbers of hrs worked annually 3120 Annual salary $30,000 Other frienge benefits $10,000 Total employment cost of David $40,000 Cost per hr $12.82 labour Cost of part time workers Average work hrs - 24 / per Temporory workers paid - @/ hr 9 payroll tax and other cost 1 Total cost of per hr pf part time workers $10.00 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Number of hrs worker per month 722 656 727 705 727 705 727 727 705 727 705 727 Cost per month for tem. worker@ 10per hr $7,220 $6,560 $7,270 $7,050 $7,270 $7,050 $7,270 $7,270 $7,050 $7,270 $7,050 $7,270 Total labour cost for temprory workers $85,600 Total labour cost for year 1 $125,600 calculation of overhead cost Rent - to hospital @2000/ month $24,000 Lease cost of equipments @ 150/ month $1,800 Electricity cost - paid born by david Total annula over head cost $25,800 Selling and administration cost accounting fee @ 200 / month $2,400.00 Insurance @1000/ month $12,000.00 Advertisment and promotion @ 500/ month $6,000.00 Total SG&A $20,400.00 sales Products variant Small medium large Sales price per cup $1.25 $1.65 $1.95 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Total No. of cups sold each month 9300 9800 10850 9500 9300 9000 8800 8600 11000 11620 12000 12400 Small cups 10% of total cups sold 930 980 1085 950 930 900 880 860 1100 1162 1200 1240 Medium 50% of total cups sold 4650 4900 5425 4750 4650 4500 4400 4300 5500 5810 6000 6200 Large 40% of total cups sold 3720 3920 4340 3800 3720 3600 3520 3440 4400 4648 4800 4960 Small medium large Toatl numbers of cups sold annully 12217 61085 48868 Sales price per cup $1.25 $1.65 $1.95 Revenue for each cup variant $15,271 $100,790 $95,293 Income statement of david Grind Revenue from All product segments $211,354 Material cost Small 4764.63 medium 32680.475 large 33230.24 Total 70675.345    (70,675.35) labour cost temp $85,600 david $40,000 (125,600.00) Overheads    (25,800.00) SG&A    (20,400.00) Earning before Intrerst and taxes    (31,121.25) Cost incures Fixed or variable materila cost variable labour Fixed Overheads Fixed SG&A Fixed

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.