Managerial Accounting

Evelyn’s Sweets

Evelyn has been working as an Administrative Assistant for the past four years. As a mother of an energetic five-year old, the part-time job has worked well for her. With Mick, her son, heading off to school next month (September 2022), Evelyn is considering new career options, perhaps starting in January. Her employer has been getting busier and has offered Evelyn full-time employment if she ever desires it. The full-time offer would transition Evelyn from an hourly rate of $21 per hour (she typically works 20 hours a week) to a salary of $44,000 per year (she is expected to work 35 hours a week).

In recent years, as Mick has grown up, Evelyn and her husband, Heath, have earned just enough to make ends meet. However, they are now looking to grow their savings while continuing to pay off their three-bedroom townhouse. As Heath’s income is expected to remain roughly constant over the near term, Evelyn pondering how she can boost her earnings. It’s not critical to amass more cash immediately as the couple has secured a $20,000 line of credit at 4.20% (there is no current balance and the rate expected to remain steady for the next year).

Evelyn has a natural talent for baking. Adults and children alike have complemented her cupcakes, cookies, muffins, etc. A fair number of them have told her that she could succeed if she were to start her own business. With some early planning/research, Evelyn has determined that the following sales numbers are reasonable for her first month of business, possibly January 2023:

Evelyn has projected monthly fixed costs of $700 when she starts her business (these are currently incurred as living expenses though at lower rates such as depreciation of baking oven). There will also be approximate variable expenses equal to 38% of the sale price for each baked good (including other).

Evelyn has unused (and unfinished) space in her basement which can be used to build a bigger kitchen with storage. It would cost an estimated $14,000 to finish the basement, as well as an additional $5,000 in industrial-grade baking appliances (can only be installed in the basement due to input constraints). In theory, the basement, once finished, can be rented out at a rate of $800 per month, but, since purchasing the house seven years ago, Evelyn and Heath have opted not to finish the space for rental purposes.

With industrial appliances, Evelyn can bake, in addition to $1,000 worth of “other” goods, 500 items in total of cookies, cupcakes, and muffins (e.g. 200 dozens of cookies, 150 half-dozens of cupcakes, and 150 quartets of muffins) while working on a part-time work basis. Without industrial appliances, this volume could only be managed on a full-time work basis. Evelyn is wondering if the basement investment is worthwhile now or in the future. She wants a detailed analysis with all possible elements taken into consideration.

Evelyn is wondering how she may depreciate appliances. As her business is expected to grow, so will the use of appliances. Evelyn is wondering about how depreciation works, the most appropriate depreciation method for her needs, and how a sample monthly journal entry may look like.

Currently, Evelyn is projecting a growth rate of 4% per month compounding monthly for the first 24 months. This will be followed by annual growth of 7% per year for the next three years (at which point the business will be considered mature with no further growth). Evelyn is wondering if it is worthwhile to put some effort into marketing. By spending $200 a month on flyers, she believes the initial two-year monthly growth rate can be boosted to 4.25% (the growth rates after two years would remain unchanged).

By spending an extra $600 monthly on social media advertising, Evelyn can add an extra 0.25% to both the two-year growth rate as well as the three years after it. However, she is reluctant to use social media as she feels there may be some ethics issues. Evelyn is looking for advice on running an ethical business and wants a recommendation on the best marketing strategy for her.

Due to her administrative assistant experience, Evelyn is semi-aware of the importance of keeping accurate records and having a reliable accounting system. She wants you to give her some more advice on best accounting practices. Due to her busy schedule and slight disdain for numbers, Evelyn is strongly considering asking her friend Ryan to be a business partner with her. She is thinking of asking him to pay her $8,000 for a 30% share of the business. Additionally, he would be responsible for completing the bookkeeping and buying baking ingredients on a weekly basis. Without Ryan, these tasks would take 20% of Evelyn’s entrepreneurial work time. Evelyn wants a pros and cons analysis, as well as a recommendation, of taking on Ryan as a business partner (either now or in future).

Required

Evelyn wants a detailed analysis of her business plan. She wants advice on ethics, business strategies, and other relevant matters. Evelyn welcomes any recommendations, as well as any questions to her which will help you better analyze her options. Please prepare a business memo to Evelyn, addressing all issues raised in this case.