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NOTE: This case is often used in ACCT-5012, Managerial Accounting, which you take in this program. I copy of the case provided in Managerial Accounting is provided as a reference starting on page 9 of this package. You should read the Accounting component of the case as a reference, some of the information may be relevant to decisions you wish to make from the Operations Management side of the business.

ORIGINAL CASE PROVIDED IN ACCT-5012 – MANAGERIAL ACCOUNTING

LONDON PASTRY

Revised 01-18

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NOTE: This case analysis was originally provided to students in the Managerial Accounting Course (MGMT-5012) which is offered in the BAL Advanced Diploma Program and the Logistics & Supply Chain Management Graduate Certificate Program. It is used again in this course Operations Management (MGMT-5059 or MGMT-6081) as an analysis to show how communication and cooperation are important within any organization.

You are being provided with the original Accounting case, as well as additional information that relates to theoperations side of the business. Your case analysis is to focus on the Operations side of the business, not the Accounting side.

ORIGINAL CASE

INTRODUCTION

Assuming you are the owner of the small bakery company (London Pastry), and for thepasttwoyears, the volume of business has grown so much that no longer can satisfy the demand. You have been investigating new facilities and equipment, and checking the possibility of hiring a few employees. However, there is one problem; you don't have the money to expand!

You meet with a local bank manager. You share your ideas and the needs for borrowing some money. The manager states that the bank cannot lend you any money without a business plan that describes your financial results, marketing strategy, and projections for the future. You show the banker your income statement and balance sheet as of the most recent year-end, and the manager is impressed. But what he needs to see is what you plan to do with the money that I will lend you and what your business will look like next year.

After the meeting, you pull out your old accounting class notes.

You settle in to produce a plan for next year.

PART 1

In the beginning, you need to realize that you must gain an understanding of the cost components structure, and the relationship between revenues, costs, and profits. You pull out your recipe to see what ingredients it takes to make a dozen donuts, croissant, muffin, brownie, cake or cookies. Next, you go to your invoice files to determine the cost of each of the ingredients. You start to develop a list of the new costs that you must incur when you expand your operations. After analyzing all of this data, you can break out your costs into several categories. Some costs are for raw materials while others are related to manufacturing overhead or operating expenses. You also realize that some costs are to be fixed while other costs are variable. Now you have sufficient information to determine how much money you can make when you sell this pastry.

Requirements Part 1

1-Prepare a schedule to presents your expenses in the categories of raw materials, manufacturing overhead, and operating expenses.

Hints:

Think of your favorite pastry. Search and find a recipe for this type of pastry. Use this recipe to determine the number of ingredients (raw material. e.g., sugar, flour eggs, etc.) required for one dozen or unit:

Also, you need to think of you’re:

Sales Price (cost plus:The company applies a standard 30% markup to all of its products unit cost).

Direct Labor.

Manufacturing Overhead (Variable per dozen or unit, Fixed per month).

Operating Expenses(Variable per dozen or unit, Fixed per month).

2-Calculate the following:

a)Total variable costs per dozen or unit.

  1. Sales price per dozen donuts using “markup on variable costs.”
  1. Contribution margin per dozen or unit.
  2. The breakeven point for the quarter (three months) in dollars and units.

Note: Make sure you turn in a copy of your recipe with your calculations

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PART 2

Now you have all the information you need to create a budget that will allow you to show the bank manager your plans for the coming year. Also, it will help you to understand your sales and the collection of those sales. It will tell you how much money you need to purchase the raw materials (ingredients) for your pastry and to pay your overhead and operating expenses. It all begins with sales. You need to estimate how many units of pastry you can sell; then you can calculate how many ingredients to buy and how much my overhead and operating expenses will be. You pull up the spreadsheet and begin working.

Requirements for Part 2:

Table 1 presents information regarding your budgeted sales, expected collection, purchasing and payment patterns for the first four months of the year.

  1. Use the spreadsheet to prepare the following operating budgets:

  1. Sales Budget

  1. Schedule of Cash Receipts

  1. Production Budget

  1. Direct Materials Purchases Budget

  1. Cash Disbursements Budget

  1. Manufacturing Overhead Budget

  1. Operating Expenses Budget

PART 3

After completing the operating budgets, you need to know what profits projected, the money you need to borrow during the period to make additional equipment purchases. Any loan interest, and tax payment.

Requirements for Part 3:

Table 2 contains information regarding your capital contributions, equipment purchases, loans, minimum cash balances, and estimated tax rate.

Use the information from Table 2 and information from your operating budgets completed in Part 2 to prepare the following for the first quarter of the year.

(a)Budget income statement (variable)

(b)Cash budget

(c)Budget balance sheet

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Table 1
Sales forecast , Collections, Purchases and Payments
Monthly sales forecasted (in dozens or units):
Number* / Number*
January ?
February ?
March ?
April ?
*Enter the appropriate number in this column.
Because of the business expansion, pastries production came to freeze at year end.
Therefore, you expect to have nouncollected accounts receivables, unpaid accounts payable,
Or raw material inventories on January 1, the beginningof your budget period.
Collections on Sales:
Percentage
Cash sales are collected in the month of sale. / 40%
Credit sales are collected in the next month. / 40%

Cash sales are collected in the month follow 20%

Production:

The company produces the pastry daily. No work-in-process or finished goods inventories are maintained.

Raw materials:

The company plans to maintain an ending inventory of raw materials at the end of each month.

The company desires to maintain a percentage of raw materials production needs for the next month.

Desired ending raw materials inventory percentage: / 10 %
Payment for Raw Materials:
Percentage
Paid in the month of purchase / 60%
Paid in the month following purchase / 40%

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EXHIBIT 2
Other Transactions
Initial investment:
Capital contribution in January / $75,000
Borrowing:
Bank loan in January / $70,000
desired minimum cash balance at the end of the month / $10,000
All borrowing is done at the beginning of a month; any repayments are made at the end of a month. As cash over $10,000 is available at the end of the month, you will make repayment of outstanding loans in multiples of $1000.
If additional borrowing is necessary to maintain the $10,000 end-of-month balance, The company has an agreement with a bank that allows the company to borrow in increments of $1,000 at the beginning of each month.
The interest rate on these loans is 1% per month(18% annual rate) is paid monthly on total outstanding borrowings at the end of the prior month.
Fixed asset acquisition:
Budgeted fixed asset acquisitions in January / $85,000
Income taxes:
Income tax rate / 30%
Income taxes are paid at the end of each quarter on net income for that quarter.

Total grade for each part + presentation worth the following: (Accounting Case)

Part 1 – 7.5 points

Part 2 – 7.5 points

Part 3 – 7.5 points

Presentation- 7.5 points

LONDON PASTRY

Operations Management Perspective

You have been hired by the owner of London Pastry to assist in the development of a better method of preparing the products to meet the increasing demand for the bakery products offered by London Pastry. As this is a small business with very few employees you will be responsible for several areas of the business, all which relate to Operations Management. These will include Inventory, Scheduling, Planning, Forecasting and Purchasing.

London Pastry manufactures a wide range of items considered to be pastries. For this analysis select one of the following to construct your case analysis around.

  • Donuts (Doughnuts)
  • Croissants
  • Muffins
  • Brownies
  • Cake
  • Cookies

You need to select a recipe (favorite or one you locate) to use in the development of your analysis. The recipe must be included in your report. All products with the exception of cakes and cookies are baked fresh daily, cakes and cookies are prepared and baked every other day. Your bakery operates six days per week, Monday to Saturday.

Your choice of pastry will determine the raw materials required to make the selected product. You are to create a Bill of Materials for a single unit of the selected product, as well as an expanded Bill of Materials for a batch of product. As the products are baked fresh daily, your batch size will be what you feel can be sold to the public in a day.

You sell your products in a store located at the front of the bakery, as well as supplying a small number of coffee shops and restaurants in your city. Currently the company has been supplying four shops as well as their own retail location, but is hoping to expand this distribution with your assistance and expertise. The retail store at the bakery operates from 7:00 am till 3:00pm. Fresh baked goods are delivered to resale customers by 7:00 am each day.

The bakery is currently located in a high traffic area near industrial, commercial and residential activities. There are three major city roadways close to the bakery, and the bakery sign is visible from all the roads. The store also serves coffee, but relies on sales of its pastry products. There is no sitting area (small café style) for patrons and customers so the sales are either individual pastries or multiples for customer to take to work or home.

You need to concentrate on efficiency of the immediate production activities before you can expand the business and as such need to create a schedule for production and employees, both in the retail store and the production facility. There is a staff of 10 people at London Pastry, including yourself. The breakdown is as follows: 3 Administrative staff, you, the owner and a bookkeeper. The bookkeeper works from 9:00 am till 5:00pm Monday to Friday. There are two employees in the retail store, one who also assists in the factory during off peak periods in the store. The other five employees are all involved in the creation and bakery process.

The retail employees’ work from 7:00 am till 5:00pm daily, the production employees work 8 hour shifts daily. All employees are entitled to two weeks’ vacation yearly, and the only restriction is that only one person can be off at a time.

There are two commercial baking ovens in the company, that produce all the products sold. The fresh nature of the products means that ovens are busy all day. Depending on the recipe, cooking times will vary by product. This must be taken into consideration when scheduling baking.

There are also two commercial grade production mixing machines in the facility, these are used to mix all the ingredients for all the products manufactured, and scheduling these machines is also to be taken into consideration

Associated Costs for this operation are:

Mixer Cleaning:

2 employees

90 minutes

$15.00 per hour per employee

Oven Cleaning:

Twice monthly

6 hours

2 employees

$15.00 per hour per employee

Complete Clean & Sanitization:

Monthly

8 hours

6 employees

$15.00 per employee

Mechanical Inspection/Maintenance

Monthly Contract - Flat Rate $250.00

Includes 2 scheduled maintenance calls

Additional calls at $25.00 per hour

Overhead is to be considered as 15%.

Production Equipment:

London Pastry has several pieces of equipment related to the production of its products. These are:

WORK TABLES – Stainless

Work tables come in a number of sizes

  • 24” x 60”225.00
  • 30” x 48”200.00
  • 30” x 60”250.00
  • 30” x 72”275.00

Based on your chosen pastry, select a table or tables that you feel you will need, ensure they are included in your overall costing.

SPIRAL DOUGH MIXER - Hobart Canada Model No. HSL220‐1

  • Hobart Spiral Mixer, 8.5 HP spiral motor & a 1.5 HP bowl motor,
  • 220‐ pound capacity
  • Two fixed speeds with 15 minute timers plus a reverse speed & Jog Control feature.
  • Has an extra pulley & strong SS spiral dough hook, 208/60/3
  • Cost of Dough Mixer - $21,619.20

RACK OVENS - Hobart Model No. OV500

  • Hobart Double Rack Oven – Natural Gas
  • Stainless Steel Interior & Exterior
  • Energy Saving Idle Mode
  • Advanced Digital Programmable Controls
  • 3 pane windows
  • Safe to the touch
  • Soft Start Rotation System
  • One year Parts & Labour Warranty
  • Cost of One Oven - $33,000.00

REFRIGERATED PASTRY & CAKE DISPLAY CASE

  • Igloo Refrigeration Model JMRPP4/JMRSP4
  • Standard features
  • Painted steel finish (JMRPP)
  • Stain-steel finish (JMRSP)
  • Back sliding door with double insulated glass
  • Curved, high-movable front glass
  • Defogger (front glass)
  • Display shelves (height/angle adjustable)
  • LED lights on each shelf
  • Adjustable sloping shelves
  • Adjustable legs
  • Compressor (built in)
  • Dynamic cooling
  • Ecological polyurethane foam insulation
  • Electronic programmable thermostat
  • 115v-1ph-60Hz 12A
  • Max Fuse 15a
  • Size: - 15 ½” Length x 32” Depth x 54” Height
  • All measurements are approximates
  • All equipment designed to operate in controlled environment below 75°F (+24°C) temperature and HR 55% relative humidity.
  • Specifications are subject to change without notice
  • Cost of One Refrigerated Display Case - $6,600.00
  • Weight is 450 pound

INDOOR WALK-IN COOLER/FREEZER

Curtis Walk-in Systems consist of sectional, modular prefabricated panels, designed for ease of installation, high insulation value, usable storage capacity and reduced operating costs.

  • Curtis Walk-In Products
  • Over 80 years of product improvement and innovation
  • Eco-mate Foam - Greenest foam in the World with ZERO GWP, Zero ODP and exempt from Volatile Organic Compounds
  • Fully Approved with CSA; UL; ULC; CFIA; ETL.
  • Features
  • Product available with Cam locks and without Cam locks
  • Fire rated product available and the best fire rated panels in the industry at the time of writing
  • Hinged Doors, Sliding Doors, Glass Doors
  • Doors are strong and come with reversible features as standard
  • No wood in Curtis Walk-Ins
  • Dimensions
  • Widths and lengths are available in increments of 11 1/2"
  • Standard heights are 6'10", 7'11", 8'5", 9 1/2', 10'
  • Special heights & sizes - consult Curtis for details and prices. Custom built to your specifications
  • Finishes
  • White embossed (standard finish)
  • Decorator colors available
  • Stainless steel available
  • Stucco/Embossed Aluminum - plain or white
  • Smooth Aluminum
  • Cost of one Cooler– $24,400.00

Baking Raw Materials:

Purchased from local suppliers, as London Pastry prides itself on supporting local producers and suppliers for the products it needs. Depending on the recipe you select will depend on the raw materials required. You also need to identify your suppliers.

You are being supplied information on the costing for supplies for the basic ingredients used in the bakery, these are as follows:

Commodity / Unit Price / Unit of measure / Minimum Order
Flour / .80 / Kilogram (Kg) / 10 kilograms
Milk / 1.75 / Litre / 1000 litres
Eggs / 2.50 / Dozen / 15 dozen
Butter / 2.00 / Pound (Lb) / 25Kg
Cocoa / 3.10 / Pound (Lb) / 50 lbs
Sugar (Granulated) / 1.30 / Kilogram (Kg) / 20 Kg
Frosting – Vanilla / .90 / Pound / 10 Kg

Baking Materials – Non Food

To operate the facility properly you will require a series of products used in the preparation and baking process. You need to determine exactly which items you need and price them accordingly. Remember these costs figure into the overall cost of operating the bakery.

Some items you should consider are:

  • Scoops for handling dry products (flour/sugar/cocoa)
  • Scoops for cookies
  • Spatulas for scraping bowls and applying frostings
  • Pans to cook cakes
  • Pans to cook muffins
  • Pans to bake cookies

Non-Food Related Materials:

There are however common products used by the company that are not directly related to the production it is products. These include the following:

Single Cupcake/Small Pastry Box