High fixed costs bankrupt twinkie maker – discussion

Review the article in Chapter 2 of the text titled “High Fixed costs Bankrupt Twinkie maker” regarding the bankruptcy of Hostess Brands – maker of the renowned Twinkie!  Identify the cause of the bankruptcy in terms of variable costs and fixed costs.  Utilize your knowledge of costs to suggest a plan that could have saved Hostess Brands.

High Fixed Costs Bankrupt Twinkie Maker

In 2012, Hostess Brands—owner of the iconic Twinkies lunchbox snack—announced it would go out of business and liquidate its assets. Declining sales and trends toward healthier snacking crippled the company given its high fixed costs—costs that did not decrease as the number of Twinkies and Ho Hos sold declined.  After emerging from bankruptcy in 2009, Hostess management tried to turn around the company’s fortunes through innovation and workplace efficiency. Despite initial progress reducing its variable costs, the prices of the commodities that Hostess relied on—corn, sugar, and flour—increased during the recession. Unfortunately for Hostess, the remaining large percentage of its operating costs were fixed because

union contracts made it difficult to close facilities, consolidate distribution routes, or reduce pensions owed to retired workers.  By the second half of 2011, Hostess was losing $2 million per week. With a stifling debt burden, the company filed for bankruptcy protection again in January 2012.  Further cost reductions proved elusive and controversial negotiations with unions resulted in thousands of employees striking that November. Within days, Hostess collapsed under the weight of its fixed costs and filed to liquidate its assets. The wind down resulted in the closure of 33 bakeries, 565 distribution centers, about 5,500 delivery routes, and 570 bakery outlet stores and the loss of 18,500 jobs.  As the story of Hostess Brands illustrates, managers must understand their firms’ costs and closely manage them. Organizations as varied as the United Way, the Mayo Clinic, and Sony generate reports containing a variety of cost concepts and terms managers need to understand to effectively use the reports to run their businesses. This chapter discusses cost concepts and terms that are the basis of accounting information used for internal and external reporting.