Question

1. ?Will you invest $40,000 in your friend’s business? Based on the calculations performed explain why or why not (minimum 100 words) (10 points). TAKING IN CONSIDERATION THE FOLLOWING; Margin of safety: 30,972, operaitng leverage 0.23, net profit $22,779,Calculation of Contribution per unit      
2. Selling Price       $ 2.75
   Less: Variable costs      
   Ingredients       $ 0.20
   Bakers charges       $ 0.50
   Contribution per unit       $ 2.05
   Contribution margin ratio       75
3. Total Fixed Costs   $ 51,021.00
   MC per unit   2.05
   CM%   75%
   Break Even Point (cupcakes)   24,888
   Break Even Point (sales)   $ 68,028.00 ?

Answer 1

As we know that decision of investment is based on various factors such as security of invested money, level of profitability, operational efficiency of the destination entity etc.

So on the basis of given financial & operating figures let make a decision regarding investment;

1. As we see that given information is showing good level of net profit that is why investment in the business will be good option because it will generate quite impressive returns on the invested money.

2. Contribution margin and CM% of the business are also at reasonable level thus on the basis of this figure we should make investment in the business because it shows that this business have good operational efficiency.

3. Margin of safety of this business also at good level. As we know that margin of safety shows the difference between actual sales and break even sales. Thus it means that this company is operating at more than its’ break-even point. Break even point is the point of no profit or no loss but this business is operating at higher than break even point, so investment in this business will be good option.

4. Only one factor is of worry is low level of operating leverage but on the basis of other positive factors finally we should make investment in this business.