Question

Cami Cakes sells cakes and pies. Last year it sold on an average of 1,000 cakes per month and had the following average monthly total costs:(

Rent $1,000

Materials 10,000

Hourly labor for production 8,000

Manager's salary 3,000

The normal selling price is $25.00 per cake, and Cami usually sells 1,000 cakes per month. Wal-Mart has offered to pay Cami's $20.00 per cake to supply them with 500 cakes during the next month. (Assume that this is a one-time sale and future sales to Wal-Mart are not likely). In addition, Cami's Cakes will incur a one-time transportation cost of $500 to deliver the cakes to Wal-Mart.

Assuming that Cami's has the capacity to fill this order along with all of its other production, and that accepting this order will not cause problems with any of their other customers, should Cami's Cakes sell the 500 cakes to Wal-Mart? Justify your answer.

Answer 1

Given that,

Average monthly costs are as follows:

Rent = $1,000

Materials = 10,000

Hourly labor for production = 8,000

Manager's salary = 3,000

Normal selling price = $25 per cake

Cakes sells per month = 1,000

Total costs incurred:

= Materials + Hourly labor for production + Manager's salary + Rent

= 10,000 + 8,000 + 3,000 + 1,000

= $22,000

When Cami sells 1,000 cakes at the normal price of $25 per cake,

Total revenue = Number of cakes sells * Selling price

= 1,000 * $25

= $25,000

Therefore, the profit is as follows:

= Total revenue - Total cost

= $25,000 - $22,000

= $3,000

Now,

When cami sellls 500 cakes to Wal-mart at $20 per cake and rest of the cakes at $25,

Total revenue = (500 * $20) + (500 * $25)

= $10,000 + $12,500

= $22,500

Total costs incurred:

= $22,000 + One time Transportation cost

= $22,000 + $500

= $22,500

Therefore, the profit is as follows:

= Total revenue - Total cost

= $22,500 - $22,500

= $0

Therefore, this would be a break even point where the total cost is equal to the total revenue. This means that there would be zero profit and zero loss.

As we know that Cami cakes were having a profit of $3,000 from the last year, hence, selling the 500 cakes to the Wal-mart would not be rational or beneficial for the Cami's cakes.