Reference no: EM132607484
Knead Bread Ltd. (KBL) is located in Winnipeg and produces specialty breads and buns. It is equally owned by brothers, Lawrence and David Sears, and a third shareholder, Amy Young.
It is now December 14, 2019. You, CPA, are an associate articling with the firm of Kelly & Ruzak Chartered Professional Accountants. Gary Ruzak, a partner at the firm, has just assigned you to assist him with a consulting engagement for KBL. Lawrence, David, and Amy are meeting with you and Gary to discuss their concerns.
Lawrence:
KBL has been struggling to maintain profitability. Here is some information related to our two products. We seem to be operating at full capacity these days, so we want to determine a production schedule that will optimize our profit in our current operations. As well, we would like to know how long it would take to recover the costs of purchasing a new oven given our existing demand.
David:
In addition, we have recently been asked to supply buns to the Winnipeg Arena for the upcoming hockey season and ongoing events for the next five years (Appendix II). would like to know the financial implications of this deal, as it will require a significant investment in some specialized equipment. As well, can you outline the qualitative factors that we should consider regarding this potential contract?
Lawrence: David and want to keep KBL in our family, so we will buy any shares Amy is willing to sell. For now, don't worry about the actual sale or any tax consequences - just focus on Amy's request.
The owners of KBL depart, and Gary asks you to prepare the requested information, including any relevant qualitative considerations.
Bread and bun product lines
KBL is famous for its rye bread. Both our rye bread and white bun recipes use specialized bases, to which flour, yeast, and water are added.
Baking process
It takes approximately 15 minutes to prepare batch of rye bread (40 loaves), and 30 minutes to prepare batch of white buns (45 dozen).
The baking time for a batch of rye bread is 40 minutes, and for a batch of white buns it's 15 minutes. Our oven can hold three batches of rye bread or one batch of white buns at a time. As required under health and safety legislation, the oven only operates 16 hours per day, 365 days a year. Right now, we seem to be operating our oven at full capacity and we are still having trouble keeping up with demand.
Batch components and yield
Rye bread White buns
Variable cost per batch $33.41 $38.75
Selling price $3.29 per loaf $3.09 per dozen
Demand
Daily demand for our products is currently 2,400 loaves of rye bread and 900 dozen white buns. Given the growing demand for our products, some of our customers are being shorted on their orders. Some of these customers have voiced their concerns about the impact this is having on their businesses and have threatened to take their business to a competitor if we cannot service them effectively.
Oven
A new oven has been priced out at $300,000 and will have capacity identical to that of the existing oven. The model we are considering has recently been in the news as a number of parts have been recalled. Replacement parts for this model of oven are not available locally, but the supplier assures us the issue resulting in the recall has been addressed.
Question 1. Determine a production schedule that will optimize our profit in our current operations.
Question 2. How long it would take to recover the costs of purchasing a new oven given our existing demand.