Running head: AUNT CONNIE??™S COOKIES SIMULATIONAunt Connie??™s Cookies SimulationLauren KoffinasUniversity of PhoenixAunt Connie??™s Cookie Simulation Aunt Connie??™s Cookie Company is a successful business selling lemon creme and real mint cookies since 1986. The new COO needs to make decisions to maximize contribution margin and the company??™s profits. The following details some of the decisions to help keep Aunt Connie??™s Cookies a success (University of Phoenix, 2010).
Price and Advertising Changes In September, the new COO takes over and begins to analyze data to make decisions about the price of the cookies, advertising budget, and price share to distributors. Looking at past data, the COO realizes the price of the cookies is increasing over the last several months, which is causing a decrease in volume of sales. The first step is to determine a better price of the cookies to increase the volume of sales. Lemon creme is the top seller for the company. The COO wants to reduce the price per box from $2.00 to $1.93 for the lemon creme.
The price decrease for the lemon creme results in an increase of sales from 725,000 packs of cookies or $1,450,000 in revenue to 992 packs of cookies or $1,915,000 in revenue giving an increase in revenue. The COO wants to lower the price real mint cookies price decrease from $1.80 to $1.72 per pack. This results in increase of sales from 822 packs of cookies or $1,480,000 in revenue to 968 packs of cookies or $1,665,000 in revenue. The decrease in price lowers the contribution margin, but the increase revenue offsets this affect (University of Phoenix, 2010). The next step is to determine the amount of share to the distributors.
Increasing the lemon creme share from $.06 to $0.10 will lower the contribution margin but the increase in revenue will help offset this affect. The COO did not change the share price for the real mint cookies, which does not give optimal profits (University of Phoenix, 2010). The COO decides to increase the advertising budget for both types of cookies. The COO suggests increase the expense by 50%. The increase advertising results in an increase in sales.
Although the increase expense decreases profits because advertising is a fixed cost that does not affect the contribution margin.Accepting Bulk Orders The COO needs to decide whether to accept a bulk order of 1,000,000 packs of real mint cookies. The order needs to be complete in one month. The purchaser will not pay more than $1.20 per pack.
If the COO accepts the bulk order, the productions for the real mint or lemon creme need to change to accommodate the bulk order. The COO accepts the order and decides to alter the production of the real mint cookie for the general distributors. Reducing the production of lemon creme would not be the best decision because the lemon creme has the highest contribution margin (University of Phoenix, 2010).Purchase Equipment The COO has an opportunity to buy some used equipment from a competitor. The competitor uses the equipment to make peanut butter cookies. The COO needs to decide whether to buy the equipment to make peanut butter cookies or alter the equipment to help make lemon creme cookies.
The COO decides to buy and alter the equipment to make more lemon creme cookies. The total sale possible for lemon creme is 1,600,000 packs, which is 600,000 more packs that is already produced. The breakeven point for this situation is 563,000. The COO decides to produce the extra 600,000 packs (University of Phoenix, 2010). In the end, the producing a little more than the breakeven amount results in a small profit and the company reaches their maximum production for lemon creme cookies.New Product Line The company is considering a new product of cookies, Chocorones. The facility can handle making 1,000,000 packs of these cookies in one month with labor-intensive process or invest in new equipment to produce up to 4,000,000 packs in a month (University of Phoenix, 2010).
. The sales for the new cookie are above the 1,000,000 packs per month for the last few months. The COO decides to invest in the new equipment for an equipment-intensive process.
The indifference point for this situation is 1,000,000, so for a projection of 1,200,000 packs, the equipment-intensive process is the best decision. The new equipment gives higher fixed costs and lower variable costs per unit, so this decision will be profitable if the demand is long term and more than 1,000,000 packs per month. Aunt Connie??™s Cookie Company needs to make decisions to remain a success story. Changing the price per pack to increase volume of sales, the market share to distributors, advertising expense, accepting bulk orders, purchasing new equipment, and producing new line of cookie are some situations that affect variable costs, contribution margin, fixed costs, and profitability. The COO, along with the CEO, decides to make changes to help the company achieve success and profitability.
ReferencesUniversity of Phoenix. (2010). Contribution margin and breakeven analysis [Computer Software]. Retrieved March 6, 2010, from University of Phoenix, rEsource, Simulation.
ACC 561 ??“ Accounting Course Web site.