Question

You start a lemonade stand. You estimate that you will sell 1,000 glasses of lemonade during the upcoming year. Each glass of lemonade sells for $3. Each glass comes with the following costs: Lemons, cups & sugar $ .90 Labor .20 Sales commission .30 $1.40 You also have the following costs for the year: Blender depreciation $ 500 Equipment maintenance $ 500 Rent on lemonade stand $ 500 Accountant $ 500 There are no other costs incurred. Because you only sell fresh lemonade, you don’t keep any inventory of anything. Required: 1. What are your budgeted (estimated) sales for the year? $2,000 2. What are your budgeted production costs for the year? Break this amount down between the major categories of production cost (direct materials, direct labor and overhead). 3. What are the budgeted other costs (not related to production)? 4. What are your estimated total costs for the year? 5. What are your budgeted profits for the year? 6. Of the above costs, are there any that you would expect to incur every time we make a glass? How much are these per cup? How much of these would we budget for the upcoming year in total? 7. Of the above costs, are there any that you would expect we will NOT incur more of every time we make a glass? How much of these would we expect IN TOTAL for the upcoming year. 8. What is the total for the year for #6 and #7 above? How does this compare to #4? 9. How many cups must you sell in order to “break even” for the season? 10. How many cups must you sell if you wish to make a profit of $1,000 for the season?

Answer 1

1. Budgeted sales for the year = 1,000 x $ 3 = $ 3,000.

2. Budgeted Production Costs :

	$
Direct Materials	900
Direct Labor	200
Production Overhead $ ( 500 + 500)	1,000
Budgeted Production Cost	2,100

3. Budgeted Other Cost :

	$
Sales Commission	300
Rent on lemonade stand	500
Accountant salary	500
Budgeted Other Costs	1,300

4 .Estimated Total Costs = $ 2,100 + $ 1,300 = $ 3,400.

5. Budgeted profits = Budgeted Sales - Estimated Total Costs = $ 3,000 - $ 3,400 = $ ( 400)

6. Estimated cost per cup = $ 1.40.

Budgeted variable costs per year = 1,000 x $ 1.40 = $ 1,400.

7. Fixed Costs per year = $ 2,000.

8. $ 3,400.

9. Number of cups to break even = Fixed Costs / Contribution Margin per unit = $ 2,000 / $ ( 3.00 - 1.40) = 1,250 cups.

10. Number of cups to be sold to make a profit of $ 1,000 = ( Fixed Costs + Target Profit) / Contribution Margin per unit = $ ( 2,000 + 1,000) / $ 1.60 = 1,875 cups.