Master Budget & Decision Making Project For Cookie Business

Master Budget & Decision Making Project for Cookie Business

Integrate your business plan update by preparing a comprehensive master budget for the first quarter (January-March 2008), including sales, production, direct materials, direct labor, factory overhead, selling, general & administrative expenses, cash flow, and income statement projections. Additionally, analyze the cost implications of manufacturing versus purchasing cookie dough, considering production volume ranges. Use your company's name to personalize all budgets and calculations, and prepare flexible budgets for different production levels. Present your decision analysis on whether to make or buy the cookie dough, including the level of production at which you would be indifferent between the options.

Paper For Above instruction

The decision to transition from buying to manufacturing cookies entails comprehensive financial planning, primarily through the development of a detailed master budget and associated financial analyses. This process enables the business to assess profitability, cash flows, and operational efficacy for the initial quarter of operation, from January to March 2008. The fundamental goal involves quantifying the costs and revenues associated with manufacturing double chocolate chip cookies and comparing this to the alternative of purchasing pre-made dough.

Cost Calculations and Budget Components

The core calculations begin with understanding the variable production costs per batch of cookies, which include raw materials such as flour, sugar, eggs, butter, and chocolate chips. The specific costs per unit of these materials are critical for deriving total variable costs. For instance, flour and sugar each cost $0.20 per cup, eggs are $0.10 each, butter costs $2.50 per cup, and chocolate chips are $2.00 per cup. Given that each batch of 6 dozen cookies (72 cookies) requires 1.5 hours of labor at $12 per hour, direct labor costs per batch are calculated accordingly. Accordingly, the variable factory overhead per batch covers utilities ($0.25) and indirect materials ($0.60), providing a total variable manufacturing cost per batch.

The selling price is set at 350% of the total variable production costs, reflecting a markup strategy for profitability. Once variable costs are determined, the contribution margin per batch is calculated by subtracting total variable costs from sales revenue. To determine the break-even point in units and dollars, total fixed costs—comprising monthly depreciation, maintenance, and insurance—are incorporated, alongside the contribution margin per batch. These figures provide crucial insights into the number of batches needed to cover all fixed costs and achieve profitability in the quarter.

Budget Development for the First Quarter

The sales budget estimates the number of batches sold each month based on an initial figure for January (derived from the student ID digits), with subsequent months projecting a 15% increase. This forecast informs the production budget, which includes desired ending inventories set at 25% of next month’s production needs, and beginning inventories based on prior month figures. The direct materials budget enumerates raw materials needed for production, accounting for ending inventory requirements at 15% of upcoming month needs, with purchases scheduled on credit—70% paid in the following month and 30% in the current month.

The direct labor budget estimates hours based on batch requirements, directly linking to payroll expenses. Factory overhead budgeting separates variable costs—utilities and indirect materials—and fixed costs—including maintenance, depreciation, and insurance—allocated monthly. The selling, general & administrative budget incorporates both fixed costs (salaries, depreciation, miscellaneous expenses) and variable costs (sales commissions, shipping costs), with payments aligned to timings of incurrence.

The cash budget consolidates all cash inflows and outflows, including collections from sales (75% cash, 25% credit, with collections due in the following month) and payments for raw materials, labor, overhead, and administrative expenses. The projected income statement synthesizes these data points, providing a comprehensive view of expected profitability for the quarter.

Flexible Budget Analysis for Different Production Volumes

To evaluate operational flexibility and cost control, a flexible budget is prepared for productions of 10,000, 20,000, 30,000, and 40,000 batches. This budget adjusts variable costs proportionally to production levels, while fixed costs remain unchanged, enabling a comparison of total costs at different output levels. Such analysis aids in understanding economies of scale and operational leverage.

Make-or-Buy Decision

The alternative of purchasing premade dough at $30.50 per batch is analyzed against manufacturing costs. The analysis factors in direct labor at 30% of in-house labor costs, factory overhead at 40%, and eliminates fixed manufacturing overhead if dough is bought. The relevant costs are compared to determine break-even purchase price or production volume where the decision would be indifferent. This informs management whether building internal capacity or outsourcing is more cost-effective at various production levels.

Conclusion

The comprehensive budgeting and analysis provide the financial foundation necessary for informed decision-making. Through careful examination of costs, revenues, and operational flexibility, your business can optimize profitability and establish strategic production and sourcing policies. Continuing to refine these budgets as actual data become available will further enhance business performance and strategic agility.

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