2019

STUDENT CASE
COMPETITION
The Student Case Competition
is sponsored annually by IMA
to provide an opportunity for
students to interpret, analyze,
evaluate, synthesize, and
communicate a solution to a
management accounting
problem.
ANGIE’S EMPANADAS:
PRICING DECISIONS
FOR A START-UP
A small business owner
is considering expanding
her business and needs
help to evaluate the first
six months of operations
and determine how to
reach her profit goals.

By A. CRAIG KELLER, CMA, AND

MICHAEL R. HAMMOND, CPA

August 2018 / STRATEGIC FINANCE / 83

 Table 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

S
oon after Angie Keller graduated college, she
began talking with her family and best friends
to help figure out her career options. She had
just delighted a large group of people with her
delicious Peruvian cuisine at her graduation
party, so her first thought was to open a Peru-
vian restaurant. As a nontraditional graduate of her univer-
sity’s hotel and restaurant administration program, she was
aware of the challenges of running a restaurant, including
the long hours and high failure rate. After abandoning the
idea of a restaurant, she began considering other food-
service operations such as catering or supplying specialty
items, for example, appetizers or desserts.
One idea she considered was selling empanadas. An
empanada is a pastry made with modified pie dough filled
with various ingredients. The dough is rolled out and cut
into three- to four-inch circles. A heaping tablespoon of
pre-cooked ingredients is placed in the center, and the
dough is folded over the ingredients and pinched closed.
Then the empanadas are baked at 350 degrees for about one
hour. When there are 15 minutes of baking time left, the
pastry is brushed with egg. Ingredients vary but often
include meat mixed with vegetables and spices, or even
fruit, as well as vegetarian varieties. Different regions of
Latin America favor diverse types of empanadas. For
instance, pumpkin empanadas are popular in Mexico.
Angie had long been told that her empanadas were the
best in town, and they travel well. They can be frozen and
retain their good quality and taste even after being
defrosted and reheated. So she decided to create Angie’s
Empanadas, a wholesale food-service company, to sell her
empanadas to local restaurants. The company sells three
kinds of empanadas: Peruvian (chicken), Argentinean
(beef), and vegetarian. The empanadas are assembled in a
rented kitchen, with fully cooked fillings. Then they are
baked and placed on trays in batches of eight small
empanadas. Currently Angie sells trays of the three types
for the same price. Restaurant clients unwrap the tray,
brush the empanada tops with egg wash, and heat them for
10 minutes before serving them as appetizers.
Starting the Business
When looking to start a business around her empanadas,
Angie first considered a large-scale rollout of pre-packaged
empanadas for grocery stores and big-box retailers but
quickly realized that option was premature. She then
decided to explore the possibility of a smaller-scale rollout,
selling empanadas to local restaurants.
Over the next few days, Angie did some basic research
and found that there were about 800 restaurants in the
local metropolitan area. Because empanadas are common
throughout Latin America, she narrowed the prime target
market to some form of Latin American food. She found
approximately 100 restaurants that could be classified as
Latin American, with the majority identifiable as Mexican

84 / STRATEGIC FINANCE / August 2018

 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:
restaurants. Of these, she identified
21 as national or regional chains such
as Taco Bell and Chipotle Mexican ACTUAL INGREDIENT COST BY TYPE AND
SALES MIX BY MONTH
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-
PERUVIAN ARGENTINIAN
ond list of non-Latino restaurants and QUANTITY VEGETARIAN (CHICKEN) (BEEF)
bars that might be interested in her
empanadas. Excluding national April 300 20% 40% 40%
chains and types of cuisine that were May 340 5% 45% 50%
obviously a poor fit, she pared down
the list to 130 in total. June 470 10% 42% 48%
At the same time, she was per- July 672 8% 42% 50%
fecting her recipes and estimating
August 847 8% 43% 49%
costs. She identified a few fully
equipped kitchens she could rent for September 1,290 12% 44% 44%
between $700 and $2,000 a month,
Total 3,919 10% 43% 47%
depending on size, equipment, and
location. She also estimated the cost Cost per tray $1.265 $2.300 $3.105
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

August 2018 / STRATEGIC FINANCE / 85

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-
86 / STRATEGIC FINANCE / August 2018
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.