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. 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.

Requirements:

Using separate tabs in a spreadsheet, provide your answers for the following. Show Work

For the following questions use the anticipated selling price of $3.00 per cupcake

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.

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

Answer 1

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.
Question states that Sales is Increased by 10% (to 39600 cakes)
Therefore Sales before increament of 10 % = 39600* 100/110	36000
Statement of Comparative Profit
PARTICULAR	(36000 unts) EXISTING $	AFTER 10% INCREMENT (39600 unts) $
Sales @3 per unt	108,000.00	118,800.00
Less Variable Cost
1. Ingradiant @ .25 per unt	9,000.00	9,900.00
2. Boxes of cup cakes @ .03 per unit	1,080.00	1,188.00
3. Wages to Baker @0.50 per unit (= >18/36 =0.50 )	18,000.00	19,800.00
Total Variable Overhead	28,080.00	30,888.00
Total Contribution	79,920.00	87,912.00
Fixed Costs
1. Rental	14,400.00	14,400.00
2. Business Insurance	750.00	750.00
3. Advertisement Cost	5,000.00	5,000.00
4. Depreciation (100000-0)/10yrs	10,000.00	10,000.00
5. Payment to Store Personnel per year (56*10* 52 weeks per year)	29,120.00	29,120.00
Total fixed cost	59,270.00	59,270.00
Operating Profit	20,650.00	28,642.00
Percentage Increase in operating Profit		38.70%
b.) Calculate how many cupcakes need to be sold in order to make a $30,000 target profit for the year.
Calculation of Desired Contribution
Particular		Amount $
Desried Profit		30,000.00
Add Fixed Cost
1. Rental		14,400.00
2. Business Insurance		750.00
3. Advertisement Cost		5,000.00
4. Depreciation (100000-0)/10yrs		10,000.00
5. Payment to Store Personnel per year (56*10* 52 weeks per year)		29,120.00
Total Desired Contributon (a)		89,270.00
Calculation of Cotrubution Per Unit
Particular		Amount $
Sales		3.00
Less :
1. Ingradiant @ .25 per unt		0.25
2. Boxes of cup cakes @ .03 per unit		0.03
3. Wages to Baker @0.50 per unit (= >18/36 =0.50 )		0.5
Total Variable Overead		0.78
Contribution Per unit (sales - VOH)		2.22
No of unites to be sold to achieve desired Profit of $30000
Total Desired Contributon (a)		89,270.00
Contribution Per unit (sales - VOH) (b)		2.22
Hence No of Units (a/b)		40211.71171
Hence No units to be sold to achieve profit of $30000		40212 Units Approx