Question

***Please show work***

Business Description

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 in ACCT 551 Accounting for Managers, 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.

Answer following:

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).

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

Prepare a cash budget for the company’s first year of operations based on sales of 36,000 cupcakes. Assume all sales are cash sales and that all costs and expenses are paid in cash. Equipment will be purchased prior to the start of business using the investment of $50,000 plus the friend’s contribution of $50,000. Rent, insurance, and advertising costs will be paid on a monthly basis You decide to maintain a minimum cash balance of $5,000 (15 points).

Will you invest $50,000 in your friend’s business? Based on the calculations performed explain why or why not (10 points).

Answer 1

Calculations have been done assuming Sales for the period July 2018 to December 2018 - 6 months
Scenario A Scenario B No. of Cakes (from July to December) 36,000 39,600 Sales (No of Cakes * Selling Price) $108,000 $118,800 Less: Cost of Goods Sold (No of Cakes *0.03) $1,080 $1,188 Wages (No of Cakes/36*18) $18,000 $19,800 Depreciaton on Equipment for 6 months $5,000 $5,000 [(100,000/10)/2) 6 Months rent $7,200 $7,200 Business Insurance for 6 months $375 $375 Advertising Cost for 6 months $2,500 $2,500 Operating Profit $73,845 $82,737 1 If Sales is increased from 36,000 to 39600 for 6 months, the Operating Profit will improve by 82,737-73,845= $8,892 2 Operating Profit would increase by 12.04% (8,892/73,845) 3 In Order to make $30,000 profit in 6 months (July 2018 to December 2018), Contribution - Fixed Cost = $30,000 therefore Contribution = Fixed Cost + $30,000 Fixed Cost = Depreciation+Rent+Insurance+Advertisement =5000+7200+375+2500 15,075 Contribution = Contribution per unit * Number of Cakes Contribution per unit = Selling Price per unit - Variable Cost per unit Contribution per unit = 3-0.03-18/36 Contribution per unit = 3-0.53=$2.47 per unit $2.47* Number of Cakes = 15,075+30,000 Number of Cakes = [(15,075+30,000)/$2.47) 18.249 Cakes