Question

Business Description

Daisy, a friend who is an excellent baker, has decided to open a cupcake store to sell gourmet cupcakes. Daisy has asked you if you will be willing to loan the company $50,000 at an interest rate of 4% that will be paid back over 5 years. Using the skills you have developed in ACCT 551 Accounting for Managers, you will analyze the business to determine if you will loan Daisy the money. The business is scheduled to launch on January 1, 2019. Daisy has provided you with the following cost information.

Cost information:

Cost of goods sold:

Ingredients are .30 per cupcake

Cupcake Cups are .01 per cupcake

Daisy has found a fully equipped commercial kitchen near downtown with a store front that will be rented for $1,000 per month.

Utilities will be $125 per month.

On average one person can make, bake, and decorate 36 cupcakes per hour. Bakers are paid $18.00 per hour.

A worker will be needed for the store front to sell the cupcakes. Daisy plans to open the store 7 days per week from 11:00 AM until 7:00 PM. Sales people will be paid $9.00 per hour.

Business insurance is purchased at a cost of $750 per year.

Advertising costs are expected to be $3,600 per year.

Requirements:

Using separate tabs in a spreadsheet, provide your answers for the following.

What and how much are the variable costs? Present each item in cost per cupcake basis (5 points).

What and how much are the fixed costs? Present each item in total cost per year (5 points).

Write out the annual cost formula in Y = a + bX format (5 points).

You want to help Daisy set a selling price for the cupcakes. Research who the competition is and at what price they are selling gourmet cupcakes. Provide the detailed information for at least 3 competitors. Set a target price for Daisy’s cupcakes so that the business is competitive and the costs will be covered with a reasonable profit (10 points).

Develop a price using cost-based pricing assuming that Daisy expects to sell 30,000 cupcakes the first year with a 15% profit (10 points).

For the following questions use the anticipated selling price of $2.75 per cupcake

Calculate contribution margin per cupcake and contribution margin ratio (10 points).

Calculate how many cupcakes need to be sold in order to break-even. Calculate how much sales in dollars are needed to break-even (10 points).

Prepare a cost/volume/profit chart (15 points).

Based on the expected production of 30,000 cupcakes, calculate an overhead rate per cupcake that includes rent, utilities, and insurance (5 points).

If Daisy wanted to use activity based costing, identify a minimum of 3 different activities and an appropriate cost driver for each. (10 points)

Prepare a cash budget for the company’s first year of operations based on sales of 30,000 cupcakes. Assume all sales are cash sales and that all costs and expenses are paid in cash. Rent, insurance, and advertising costs will be paid on a monthly basis. The interest on the loan will be paid monthly with a $10,000 principal payment at the end of the year. A minimum cash balance of $5,000 should be maintained (15 points).

Prepare the company’s forecasted income statement for the year ended on 6/30/2019 based on the sale of 30,000 cupcakes (10 points).

Describe the variances that Daisy should analyze to monitor the business. (10 points)

Provide at least 4 metrics that Daisy could include to monitor the business using a balanced scorecard approach. (10 points)

If Daisy decides to expand her busy by investing in her own equipment, which capital budgeting model would you recommend? Why? (10 points)

Will you lend $50,000 to Daisy to start her business? Based on the calculations performed explain why or why not (10 points).

Answer 1

variable cost per cupcake

ingredients = 0.30

cup cake cups = 0.1

direct labour = 0.5 ( 18 wages / no of cupcakes produced in a hour)

total variable cost = 0.9 per cupcake

fixed cost per year

Rent = 1000* 12 = 12000

utilities = 125* 12 = 1500

insurance = 750

advertisement = 3600

manning labour = $9 per hour * 8 hrs each day * 365 days = 26280

Total = $44,130

annual cost formula

Y = 44130+0.9x where x is the no of cupcakes produced & Y is the total revenue from selling x cupcakes

Answer to part 5

Let us assume the selling price of each cupcake is x

sale of 30000 cupcakes

revenue = 30000 x

cost = 30000*.9 = 27000

profit required is 15% of cost = .15* (27000+44130) =10669.5

therefore revenue = cost + profit

30000x = 27000+44130=10669.5

x= 2.72665

if we assume 15% profit on sales then

30000x - 0.15*30000x = 27000+44130

25500x= 71130

x= 2.789