Aunt Connie's Cookie Simulation
Aunt Connie's Cookies wants to maximize their profits and this simulation helps Maria Villanueva, the company's CEO, to make cost, volume, and price decisions that will result in the highest profits for the company. In this simulation, Maria had to decide whether to spend more on advertising and which products to advertise. She was also faced with decisions regarding the volume of lemon crème versus real mint cookies to produce and what price to sell these cookies.
All of these decisions impact the company's contribution margin and their overall operating profits.
To fully evaluate the options presented, Maria must understand the how each type of cost behaves in relation to changes in volume. For example, the advertising expense is a fixed cost that will not change even when the volume of cookies produced increases or decreases. However, the cost of materials or ingredients necessary to produce the cookies is a variable cost. These costs will rise as the number of cookies produced rises. The relationship between costs, volume, and the impact on profit of these choices is demonstrated through the contribution margin in this simulation. The contribution margin presents the elements of income in a way that highlights this relationship and helps managers make better day to day decisions.
A cost accounting system that computes the contribution margin and allows managers to model their decisions can help managers make the best decisions regarding which products are most profitable, the volume of those products to produce, and how to price the products to maximize profits. In Aunt Connie's case, Maria wanted to reduce the price of lemon crèmes and mint cookies to increase volumes. However, based on her past experience, she doesn't think a reduced price alone will be sufficient to increase volumes and profits. For this reason, Maria increases fixed costs through increased advertising. She also decides to increase the margin to the distributors to help increase volumes. The key to these decisions is to find the right mix of price, fixed costs, variable costs, and volume that produces the highest profits. Maria needs to be careful not reduce prices to a level that increases volumes tremendously, but at the expense of lower profits. These decisions become even more complex when multiple products are involved.
Aunt Connie can use the cost accounting system to help determine the most profitable price point for cookies by evaluating the cost - volume - profit relationship. Maria recognizes that price reductions drive volume increases based on past experience, so this is a good starting point for her analysis. Adding a fixed cost like advertising and tracking the impact on volume and profits can help Maria to decide on the price point that maximizes the firm's profitability.
Aunt Connie's Cookie Simulation
Aunt Connie's Cookies wants to maximize their profits and this simulation helps Maria Villanueva, the company's CEO, to make cost, volume, and price decisions that will result in the highest profits for the company. In this simulation, Maria had to decide whether to spend more on advertising and which products to advertise. She was also faced with decisions regarding the volu