Question

1. Bake Cakes Ltd. operates a cake manufacturing business producing the following three varieties of occasion cakes: Birthday, Anniversary and Wedding. Each cake is initially produced as a standard cake and is later decorated accordingly. For the upcoming year the manager estimates that the variable costs of producing a standard cake, excluding the cost of decoration is €15. Decoration costs, selling prices and expected demand are as follows: Decoration Costs € Selling Price € Sales Volume Birthday 10 50 500 Anniversary 30 70 250 Wedding 45 135 120 The expected annual fixed costs associated with running the business are expected to be €10,000. The manager is seeking to achieve a profit of €30,000 per annum and is concerned that she may not be pricing her cakes at the right levels. You are asked to calculate the following: i. The expected profit for the upcoming year based on the manager’s estimates; ii. The number of extra birthday cakes that the business would be required to sell in order to achieve the manager’s desired profit, assuming no changes in the volumes of the anniversary or wedding cakes sold; iii. The number of extra birthday cakes that would have to be sold to achieve the desired profit if its price was reduced from €50 to €45, assuming no change in the prices and sales levels of the other two cake types; iv. The overall contribution margin ratio for this business.

Answer 1