How much does it cost to make empanadas

able 1:

SIX-MONTH BUDGET (APRIL-SEPTEMBER) APRIL MAY JUNE JULY AUGUST SEPTEMBER TOTAL

Trays sold 300 350 450 500 650 1,100 3,350

Sales revenue $3,450 $4,025 $5,175 $5,750 $7,475 $12,650 $38,525

Cost of sales:

Ingredients $725 $845 $1,087 $1,207 $1,570 $2,657 $8,091

Labor 1,035 1,208 1,552 1,725 2,243 3,795 11,558

Trays 90 105 135 150 195 330 1,005

Rent 1,000 1,000 1,000 1,000 1,000 1,000 6,000

Utilities 121 125 131 135 146 177 835

Delivery 650 700 800 850 1,000 1,450 5,450

Total cost of sales $3,621 $3,983 $4,705 $5,067 $6,154 $9,409 $32,939

Operating profit $(171) $42 $470 $683 $1,321 $3,241 $5,586

NOTE - MIXED COSTS VARIABLE COST PER TRAY FIXED COST PER MONTH

Utilities $0.07 $100

Delivery $1.00 $350

August 2018 / STRATEGIC FINANCE / 85

restaurants. Of these, she identified 21 as national or regional chains such as Taco Bell and Chipotle Mexican Grill. Angie identified a local chain of seven restaurants as unsuited for the product. This left 72 restaurants that she labeled prime target customers. Digging further, Angie made a sec-

ond list of non-Latino restaurants and bars that might be interested in her empanadas. Excluding national chains and types of cuisine that were obviously a poor fit, she pared down the list to 130 in total. At the same time, she was per-

fecting her recipes and estimating costs. She identified a few fully equipped kitchens she could rent for between $700 and $2,000 a month, depending on size, equipment, and location. She also estimated the cost of other items, including ingredients, labor, trays, utilities, and delivery. Then she classified each cost as fixed, variable, or mixed based on the advice of her accountant. After some additional market testing and inter- actions with potential clients, Angie

Table 2:

ACTUAL RESULTS (APRIL-SEPTEMBER) APRIL MAY JUNE JULY AUGUST SEPTEMBER TOTAL

Trays sold 300 340 470 672 847 1,290 3,919

Sales revenue $3,450 $3,910 $5,405 $7,728 $9,741 $14,835 $45,069

Cost of sales:

Ingredients $725 $901 $1,214 $1,760 $2,212 $3,255 $10,067

Labor 1,139 1,290 1,784 2,550 3,214 4,896 14,873

Trays 90 102 141 202 254 387 1,176

Rent 1,000 1,000 1,000 1,000 1,000 1,000 6,000

Utilities 121 124 133 147 159 190 874

Delivery 665 707 844 1,056 1,239 1,547 6,058

Total cost of sales $3,740 $4,124 $5,116 $6,715 $8,078 $11,275 $39,048

Operating profit ($290) ($214) $289 $1,013 $1,663 $3,560 $6,021

NOTE - MIXED COSTS ACTUAL FIXED COST PER MONTH

Utilities $100

Delivery $350

Table 3:

ACTUAL INGREDIENT COST BY TYPE AND SALES MIX BY MONTH

PERUVIAN ARGENTINIAN QUANTITY VEGETARIAN (CHICKEN) (BEEF)

April 300 20% 40% 40%

May 340 5% 45% 50%

June 470 10% 42% 48%

July 672 8% 42% 50%

August 847 8% 43% 49%

September 1,290 12% 44% 44%

Total 3,919 10% 43% 47%

Cost per tray $1.265 $2.300 $3.105

86 / STRATEGIC FINANCE / August 2018

prepared a six-month budget (see Table 1). Angie’s Empanadas opened on April 1.

The business is located in a metropolitan area with a total population of about 400,000. The area houses a university with approximately 20,000 students, sev- eral private colleges, and a technical col- lege. Both the university and the technical college offer restaurant administration degrees. The primary local industries are agriculture and light manufacturing. Angie signed a one-year lease on a

kitchen near the university that would pro- vide sufficient capacity and a ready labor supply to help her reach her short-term profit goal of $4,000 per month by the end of the first year. She feels the business needs to make at least that much profit to be worth her time. Otherwise, she will pur- sue her talent for photography. Angie does much of the preparation and assembly of the

empanadas herself, but she hires additional labor as needed, mostly students, to help make and deliver the product. The preparation and assembly is done by hand, and the dough needs to be made daily. This means labor is a relatively large part of the product’s cost. Because the ingre- dients are organic, they also are relatively costly. Angie relies on quality and excellent taste to differentiate her products, but she’s also trying to keep the price low to gain a foothold in the market. She purchases the trays locally, and they are recyclable but not reusable, meaning she must use new trays for every batch.

Six-Month Budget Review In early October, Angie compared the actual results for the first six months after the launch of her business to her origi- nal budget (see Table 2). She had expected to grow her busi- ness slowly, so she was excited when she realized that she had sold 569 more trays than budgeted and her profit exceeded the budgeted semiannual profit by $435. She was also delighted by her monthly sales figures, which had exceeded expectations each of the last four months. Based on her early success, Angie is thinking of expanding

her operation to a larger space and investing in kitchen equipment as well as other assets, such as delivery trucks. But her part-time accountant isn’t as excited. He did some addi- tional analysis across the three types of empanadas and found that the overall cost per tray for each type differs significantly (see Table 3), yet they are all priced the same. He doubts that she could reach her goal of $4,000 a month in profit by the end of the first year without making some price changes.

Special Order Angie recently received an inquiry from one of her cus- tomers, a local organic restaurant and catering company, asking for special pricing for large-event orders. Angie pre-

viously provided the customer with an order of 50 trays of empanadas in Sep- tember. The catering company picked up the trays at Angie’s kitchen, saving delivery costs, and said it would con- tinue to do so. The customer would standardize its order at 40% vegetarian empanadas, 40% Peruvian, and 20% Argentinian, but it would also require a more expensive tray ($0.75 per unit vs. the current cost of $0.30) that can dou- ble as a serving dish. This customer would also provide extended lead times for the orders. Angie doesn’t expect that the additional orders would impact her other customers. She sees this as a good opportunity but is unsure what price to quote this customer so that both sides would benefit. Angie recognized that she needs some

professional help and hired your consulting team to advise her on financial planning and analysis to evaluate the first six months of operations. She also wants advice on how to reach her profit goals.

The Assignment 1. Given Angie’s budget and profit goals, suggest which metrics Angie should use to assess the success of her new venture. Prices and costs are per tray, so use trays as the basic unit when determining per-unit amounts.

2. Analyze and compare Angie’s overall actual results with her expected results to determine why her accountant is concerned.

3. Angie’s accountant recommended that your team drill down further into the sales mix and cost figures to deter- mine how the different product types are affecting prof- its. Look for any sales-mix issues and suggest potential solutions.

4. Offer suggestions for how Angie should determine a price quote (per tray) for the special-order customer.

5. Offer suggestions to improve Angie’s operations and to help her decide whether to continue the business and, if so, how to grow it. Consider potential alternative prod- ucts, services, and marketing options. SF

A. Craig Keller, CMA, Ph.D., who passed away on April 27, 2018, was a retired member of the School of Accountancy at Missouri State University in Springfield, Mo., and was most recently an associate accounting professor at Woodbury University in Burbank, Calif. He was a proud member of IMA. Craig’s passion for teaching management accounting, and his wife’s love of cooking, provided the inspiration to develop this case study.

Michael R. Hammond, CPA, is a senior instructor in the School of Accountancy at Missouri State University and a member of IMA’s Greater Ozarks Chapter. He can be reached at (417) 836-5061 or mrhammond@missouristate.edu.