Question

You meet with Elizabeth and discuss the expected revenue and costs related to the Cookie Shop that she is planning on opening. Elizabeth has done her marketing research of customer demand and what customers are willing to pay for a dozen cookies. Elizabeth provides the Revenue and Cost information below and states you that she thinks that the shop will only be able to sell 1,000 dozen of cookies in a month based on this data.

Quantity of cookies sold (in dozens) 1,000

Selling price for a dozen cookies $17.50

Variable Cost to bake a dozen cookies $9.75

Monthly Fixed Expenses of the shop

Rent for the shop $3,000.00

Lease cost for baking equipment $1,200.00

Utilities and Maintenance $500.00

Wages paid to 1 part-time employee $1,000.00

Total Monthly Fixed Expenses $5,700.00

Elizabeth said that she will be quitting her job to work full-time in the Cookie Shop. She says that her monthly living expenses total $4,000 per month (including payments for her college loans, car payment, apartment rent and food and other living expenses). So she needs you to help her determine how many dozens of cookies will she have to sell in a month to have the Cookie Shop make $4,000 in Net income.

Monthly Target Profit $4,000.00

You discuss with Elizabeth the following 3 options that could be implemented

Option # 1 Increase the selling price of a dozen cookies by 20%. This will casue a 10% decrease in the monthly unit (dozen) sales.

# 2 Increase the selling price of a dozen cookies by 20% and spend $750 monthly for a social media marketing campaign. This is expected to keep the monthly unit sales at 1,000 dozen

# 3 Move home and live with her parents and save $2,000 per month in living expenses. This would allow the monthly target income to be reduced from $4,000 to $2,000. Use the original revenue and cost assumptions.

	Elizabeth needs help with the following questions:
1	Using the original revenue and cost assumptions, how many dozens of cookies would the shop have to sell to breakeven?
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2	Using the original revenue and cost assumptions how many dozens of cookies would the shop have to sell to make a profit of $4,000?
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3	What is the monthly net income if the selling price of the cookies is increased 20% and the unit sales decrease by 10%, with no change in fixed costs (from the original amounts)?
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4	What is the monthly net income if the selling price of the cookies is increased 20% and the unit sales do not change and total fixed cost increases as a result of the marketing expense of $750 (from the original amounts)?
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5	If Elizabeth moves back in with her parents so that her monthly living expenses are lowered to $2,000 from the current level of $4,000 and the original assumptions of revenue and costs are used, how many dozen cookies need to be sold to have the shop have a net income of $2,000?
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6	How would you explain to Elizabeth the viability of the option of her moving back in with her parents. Discuss the impact that the lower profit requirement has on the number of sales units needed to be sold.
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7	Of the three options proposed which one would you recommend that Elizabeth follow? Support your recommendation.
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8	As a friend, based on the information you analyzed, is there anything that you would want to tell Elizabeth regarding quitting her job and opening a Cookie Shop ?
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Answer 1

Part A:: Total Fixed Cost =$5700

Contribution per unit =$7.75

So, Number of units to be sold out for Break-Even point is 735.48 which is 736.

Part B :: To make a profit of $4000, units to be sold is (5700+4000)/7.75 =1251.61 which is 1252

Part C :: If selling price is $21 Per unit and demand is 900 units.

Contribution= Sales $18900 - Variable cost $8775 =10125

Profit=Contribution - fixed cost

=$10125- $5700

=$4425

Part D ::

If selling price is $21 Per unit and demand is 1000 units.

Contribution= Sales $21000 - Variable cost $9750 =11250

Profit=Contribution - fixed cost

=$11250- $6450

=$4800

Part E :: To make a profit of $2000, units to be sold is (5700+2000)/7.75 =993.55 which is 994

Part F :: By moving in with her parent, elizabeth is able to have margin of safety after meeting all her cost(including her personal expense). She will be able to save around $46.5 which could be further invest in business to increase the size of business.

Part G :: Option B is the most vible one Because profit margin is highest among all other options.

Part H :: As a friend we would like to advice to give due consideration to the opportunity cost that is losing by quiting her full time job. She should open the shop by giving due consideration to future prespective of shop in respect of all expenses as well the profit that she will be able to gain. And more of Cost cutting method like the one she thought of moving with her parent could be considered in initial years of business.