Question

JOHN-JOHN’S SWEET TABLE

John Brown and Eric Johns, both in their late 20’s, have been best friends since elementary school.  They discovered early in high school that they both have exceptional baking skills.  Both have taken baking classes and have each worked in respectable, prestigious bakeries and restaurants.

Over the years they have united their baking skills and baking passions and have taken advantage of every opportunity to distribute their baked good to family and friends.   It did not take long before   their mere sharing of baked goods developed into orders.   The John B. and E. John found themselves in the catering business.   That is, they were quite often hired to cater the dessert section of menus for wedding, parties, banquets, etc.     

About six years ago JOHN-JOHN’S SWEETABLE was legally formed and licensed to do business.     Demand grew such that their individual kitchens were deemed too small for business.   After an extensive, the business partners  relocated to a much larger facility and have a small staff of workers.   John B. and E, John expanded their operations to include private catering as well as placement in grocery stores.    Consequently, they recently retained the services of Jonathan Wright, CPA, to assist them in managing the financial affairs of the company.    The John B. and E. John see a profitable future for JOHN-JOHN’S SWEET TABLE.   They have asked Jonathan to focus specifically on growth and profitability.  

Mr. Wright  has determined that there is a need for a lot of cost analysis, especially regarding the determination of the cost of baking their specialty, cookies.   His goal is to determine a product costing system that can be used for pricing decisions and product-line planning and budgeting.   He has asked you, a summer management intern, to provide basic information that would serve as a starting point.    You provided Exhibit 1 showing actual costs and revenue data for the month of August 2018.   During that year Thomaham sold 10,350 baked items (cakes, pies, etc.)  for approximately $40 each.

After receiving the information, Mr. Wright wants you to further classify the expense as a product (direct material, direct labor, or factory overhead) or period costs and (2) classify each of the expenses as either variable,  fixed, or mixed .  She asked that you clearly justify the classification you assign to each expense.

Next, Mr. Wright wants you to determine breakeven for John-John’s Table based on your classifications in (2) above.  You can consider any mixed costs to be 30% variable, and 70% fixed.     What is your evaluation of how John-john’s Sweet Table is doing relative to breakeven?    Be very specific.

>>>Write a thorough memo in response to Mr. Wright’s request.   Be sure to present your responses clearly.   You may present exhibits to accompany your memo.

Exhibit 1.

John-John's Table
Income Statement
For the Year Ended December 31, 2019
Sales ($40 per baked item))		$414,000
Expenses:
Raw materials (Baking)	$172,165
Labor (Bakers' salaries)	104,353
Wages (General Bakery area, hourly)	30,118
Supplies (General Bakery area)	2,039
Shipping to Customers  (delivery truck)	14,582
Electricity (general baking area)	10,700
Water (general baking area)	2,254
Routine Monthy Maintenance (general baking area)	18,380
Wireless and Telephone (Administrative)	2,150
Salaries-Owners (administrative)	45,000
Sales Commission  (salesforce)	13,600
Total Expenses		415,341
Net Income (Nete Loss)		($1,341)

Answer 1

Total variable cost per 10350 units

Raw Material	172165	labour salaries	104353
Wages (General Bakery area, hourly)	30,118	monthly maintaince	18300
Supplies (General Bakery area)	2,039	wireless and telephone	2150
Electricity (general baking area)	10,700	salaries owners	45000
Water (general baking area)	2,254	sales commission	13600
Total Vaeriable cost for 10350 units	217276	Total Fixed cost	183483
VC per unit	20.99 or 21	Fixed cost per unit	17.72 0r 18
Contribution per unit = (Selling Price - Variable cost) or (SP-VC) = 40-21	19
Breakeven Point = FC/Contribition per unit	183483/19 = 9657
Breakeven point in sales = BEP in UNits x SP	9657 x 40 = 386280