Question

Business Description A friend who is an excellent baker has decided to open a cupcake store to sell gourmet cupcakes. They have asked you if you will be interested in investing $50,000 for a 50% ownership interest. The business is scheduled to launch on July 1, 2018. Your friend has provided you with the following cost information. Anticipated selling price: $3.00 per cupcake Cost information: 1 Cost of goods sold: a. Ingredients are .25 per cupcake b. Boxes and Cupcake Cups are .03 per cupcake 2 Equipment that will be required to be acquired at the start of business includes ovens, racks, display case, counter, cash register, and other baking equipment and will cost $100,000. The equipment is expected to last 10 years without salvage value. Straight-line method of depreciation should be used. 3 On average one person can make, bake, and decorate 36 cupcakes per hour. Bakers are paid $18.00 per hour. 4 Store personnel are required for 56 hours per week and are paid $10.00 per hour. 5 Monthly rent, which includes utilities, is $1,200. 6 Business insurance is purchased at a cost of $750 per year. 7 Advertising costs are expected to be $5,000 per year. For the following questions use the anticipated selling price of $3.00 per cupcake

1 Prepare the company’s forecasted income statement for the year ended on 6/30/2019 based on the sale of 36,000 cupcakes.

2 Based on the sale of 36,000 cupcakes during the first year of business, calculate the margin of safety and the operating leverage for the business. What do these figures tell you about how risky the business is?

Answer 1