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:

Cost of goods sold:

Ingredients are .25 per cupcake

Boxes and Cupcake Cups are .03 per cupcake

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.

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

Store personnel are required for 56 hours per week and are paid $10.00 per hour.

Monthly rent, which includes utilities, is $1,200.

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

Advertising costs are expected to be $5,000 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 .

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

Write out the annual cost formula in Y = a + bX format .

Answer 1

1) Calculation of Variable Cost per Cupcake :-

Particulars	Amount($)
Ingredients	0.25
Boxes and Cupcake Cups	0.03
Direct Labor ($18 / 36)	0.50
Total Variable Cost Per Unit	0.78

2) Total Annual Fixed cost :-

Particulars	Amount($)
Store Personnel Salaries (56 hours*52 Weeks*$10)	29120
Rent ($1200*12)	14400
Advertising	5000
Insurance	750
Depreciation on Equipment ($100000/10)	10000
Total Annual Fixed Cost	59270

3) Annual Cost Formula :-

Y = Fixed Cost + Variable Cost * X

Y = $59270 + $0.78X