In 1986, Aunt Connie was asked to make some cookies for an annual fundraiser. They were willing to pay $50 for 500 cookies instead Aunt Connie offered them 600 cookies for $55. She realized she would be spending $35 on ingredients for making 600 cookies and for 300 cookies it would cost her $10 to bake so it would be $20 regardless 300 or 600 cookies. By charging an extra $5, she would cover her cost and give the club more cookies. This showed people that she had a sense for business.
Today Maria Villanueva, the grandniece of Connie, is the CEO of the company and her goal for Aunt Connie’s Cookies is to increase profit and she needs to determine the best way to make this happen. Maria is responsible to decide how money will be spent to make Aunt Connie's Cookies succeed without going into debt.
First Maria will look at how the price increase for lemon crème and real mint cookies in the last few months has decreased its volume. So Maria needs to maximize her contribution margin and operating profits and she has two choices. Usually when a price reduction occurs, demand will increase so she could revise the unit prices on both the cookies or reach out to more retailers by increasing ad expenses by half on both cookies. Maria must determine how each type of cost effects changes. The advertising expense is a fixed cost that will not change even when the quantity of cookies produced varies. Looking at the cost of ingredients needed to produce the cookies it is a variable cost. These costs will rise as the number of cookies produced increases. The correlation between costs, volume, and the impact on profit of these choices is seen in the contribution margin during the simulation.
Maria can use the cost accounting system to help determine the most profitable price point for cookies by evaluating the cost - volume - profit relationship. Maria wanted to reduce the price of lemon crèmes and mint cookies to increase volumes. Maria increases fixed...