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. Using the skills you have developed, 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.

a) If sales could increase by 10% (to 39,600 cupcakes), by how much in dollars would net operating income increase? By what percentage would net operating income increase? Use the formula for leverage to calculate (10 points).

B) Calculate how many cupcakes need to be sold in order to make a $30,000 target profit for the year (5 points).

Answer A use excel and the formula for leverage

Answer 1

	Unit cost
No of cup cakes		36000
Selling price	3	108000
Cost of goods sold
Ingredients	0.25	9000
Boxes and cup cakes	0.03	1080
Cakes produced by bakers per hour		36
No of hours required		1000
hourly charges		18
Total bakers cost	0.5	18000
Contribution		79920
Contribution per unit	2.22	2.22
Fixed cost
Store personnel		31360
Monthly rent		14400
Business insurance		750
Advertisment expense		5000
Depreciation on fixed assets		10000
Total fixed cost		61510
Net income		18410
$ increase in net operating income
% increase
Degree of operating levarage		Contribution Margin /Net operating income
		4.34
Expected % increase in operating income		% change in sales *Degree of operating levarage
		43%
Expected increase in total operating income		7992
Expected total net operating income		26402
Expected total net operating income		30000
% increase		63%
Increase in sale to be		15%
% increase in net operating income / Degree of operating leverage