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 Prepare a cash budget for the company’s first year of operations based on sales of 36,000 cupcakes. Assume all sales are cash sales and that all costs and expenses are paid in cash. Equipment will be purchased prior to the start of business using the investment of $50,000 plus the friend’s contribution of $50,000. Rent, insurance, and advertising costs will be paid on a monthly basis You decide to maintain a minimum cash balance of $5,000.

2 Will you invest $50,000 in your friend’s business? Based on the calculations performed explain why or why not

Answer 1