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. Using the skills you have developed in ACCT 551 Accounting for Managers, you will analyze the business to determine if you will invest in the company. 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 If sales could increase by 10% (to 39,600 cupcakes), by how much in dollars would net operating income increase? By what percentage would net operating income increase? Use the formula for leverage to calculate

2 Calculate how many cupcakes need to be sold in order to make a $30,000 target profit for the year

Answer 1

1. If sales were to increase by 3,600 units, net operating income will increase by 3,600 x $ 3.00 x 74 % = $ 7,992.

Contribution Margin per cupcake = $ 3.00 - $ 0.78 = $ 2.22

Contribution Margin Ratio = $ 2.22 / $ 3.00 * 100 = 74 %

Total Variable Cost per cupcake : $ 0.78

Ingredients	$ 0.25
Boxes and Cups	0.03
Direct Labor ( $ 18.00 / 36)	0.50
Total Variable Cost per cupcake	$ 0.78

Total Fixed Cost per year: $ 59,270

Depreciation on Equipment	$ 10,000
Store Salaries ( 56 hours x 52 weeks x $ 10.00)	29,120
Rent	14,400
Business Insurance	750
Advertising	5,000
Total Fixed Cost per annum	$ 59,270

2. Number of cupcakes needed to be sold in order to make $ 30,000 target profit = ( Total Fixed Cost + Target Profit ) / Contribution Margin per Unit = ( $ 59,270 + $ 30,000) / $ 2.22 = 40,211.71 or 40,212 cupcakes.