Question

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:

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. Show Work

Develop a price using cost-based pricing assuming that you expect to sell 36,000 cupcakes the first year with a 15% profit .

For the following question use the anticipated selling price of $3.00 per cupcake

Calculate contribution margin per cupcake and contribution margin ratio .

Answer 1

Solution:

Calculation of the Contribution Margin Per Cupcake and Contribution Margin Ratio:

First we have to calculate the Total Cost,

Expected Units	36,000
Ingredients at 0.25 Per Unit	$9,000
Boxes and Cupcakes at 0.03 Per Unit	$1,080
Depreciation	$10,000
Labour (36,000/ 36*18 Per Hr)	$18,000
Store Personnel (56 Hrs * 52 weeks * 10 Per Hr)	$29,120
Rent	$14,400
Insurance	$750
Advertising Cost	$5,000
Total Cost	$87,350
Profit 15% on Cost	$13,102.50
Sales Value	$100,452.50
Selling Price Per Unit	$2.79

Then we can Calculate the Contribution Margin and Contribution Margin Ratio,

Selling Price	$3.00
Less: Variable Costs
Ingredients	$0.25
Boxes and Cups	$0.03
Bakers Charges	$0.50
Contribution Per Unit	$2.22
Contribution Margin Ratio	74%