Question

# “Big city, bright lights, who needs it,” you think to yourself.  After working long hours for the...

“Big city, bright lights, who needs it,” you think to yourself.  After working long hours for the last six months at Starbucks in Seattle, and the constant rain and cold, you decided to quit your job and move back to Austin.  Being temporarily between jobs, your friend from your college days at St. Edward’s, who majored in entrepreneurship and has started her own business Claudia’s Cakes, has asked you to help her out calculating some numbers for her.

“I’ve been in business for six months now, but it feels like I’m making money one moment then losing money the next,” she says.  “I would like you to take a look at my books and see where I stand.”

“Sure,” you reply.  You remember from college that a good starting point to understand what going on with a business is to do a breakeven analysis.

Claudia’s Cakes sells three products: cakes, pies, and cheesecake.  Since the name of the business is Claudia’s Cakes, Claudia has asked you to first conduct a monthly breakeven analysis of the cake product line.  Looking at the books you find the following from last month:

• Number of cakes sold last month: 651
• Cake selling price: \$25
• Total variable costs for cake last month: Cost of Goods \$7,323 and variable marketing costs of \$250
• Total fixed costs allotted to cakes: \$9,500

For each of the problems below, please write out the equation and show your calculations.

6.         Claudia is wondering if she raised the price for cakes to \$30 what the new breakeven volume would be?

7.         You suggest instead of raising the price, why not cutback on expenses for ingredients and use locally available ingredients.  Using local procured ingredients would reduce the variable cost per unit by \$1.56.  What is this breakeven volume?

8.         Would you recommend Claudia raise the price for cake or lower the variable costs?  Why? (assume she can only do one or the other)

6.

New breakeven volume if selling price is increased = Total fixed cost / contribution per unit

= \$ 9500/ 18.37\$

= 517 cake (approx)

Working note - 1

Variable cost per cake = (\$ 7323+ \$ 250) / 651

= \$ 11.63

contribution per cake = \$ 30-\$11.63 = \$18.37

7.

Breakeven volume if variable cost is reduced = Total fixed cost / contribution per unit

= \$9500 / \$ 14.93

= 636 cake ( approx)

Working note -2

variable cost per unit = \$ 11.63 - \$ 1.56 = \$ 10.07

Contribution per unit = \$ 25- \$ 10.07 = \$ 14.93

8.

Claudia should raise the price for cake because if she increase the selling price she will have higher contribution per unit and lower Breakeven point compare to reduce in variable cost per unit.

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