Question

In: Accounting

Goal: Please answer the questions below. The main goal of this homework is to see if...

Goal: Please answer the questions below. The main goal of this homework is to see if you can calculate the profit maximization point for this small wedding cake business. I hope that you will be able to merge your knowledge of basic accounting and microeconomic theory in order to calculate the profit maximization point, make comments about efficiency, and make logical recommendations to the firm's management to ensure their future success.

Current Situation:The local wedding cake business was very competitive during 2012. Delicious Deserts was the only wedding cake bakery in the entire county of two million people for several years. They often charged as much as $300 to $500 for each wedding cake. But a new competitor recently came into the market and started selling "discount wedding cakes" for less than $150. The quality and the taste of the discount wedding cakes were acceptable for most of their customers. Both businesses operated in a low-to moderate-income county in California where the average household income was not much higher than $40,000 per year.

The Challenge For Delicious Deserts: At first the news of a low-cost competitor was terrible news for Delicious Deserts. They had no choice. They had to charge from $300 to $500 per wedding cake to cover their high costs. However, because of this new competition, the husband and wife owners of Delicious Deserts decided to make the business more efficient and lower costs. They invested in better ovens and created better tasting cakes using special ingredients. Their customers went crazy over their new and unique 80 proof Italian Rum Wedding cake that actually got people slightly drunk if they ate more than three slices. To boost sales during 2012 they hired part-time telemarketers and social media experts. They also increased their advertising in traditional media such as local wedding magazines. They also displayed eye-catching ads in local churches, entertainment centers and jewelry stores. They also experimented with a new pricing model in which they lowered prices each quarter. Indeed, they found that as they lowered their prices, they sold more cakes. They hired an "A" student who took a microeconomics class with Professor Ed Torres to do an elasticity analysis. The student estimated that the price elasticity for wedding cakes was 1.25 (elastic) and that the income elasticity was 2.10 (a luxury good). The owners of Delicious Deserts were not aware of this information. The student told them that they made a huge pricing strategy error for many years by charging high prices on an elastic good within a low-to moderate-income county. The profit and loss statement below shows that Delicious Deserts made a Total Revenue of $275,000 and sold 1,375 wedding cakes. During 2012, they made three times (3X) more than they did versus 2011. Of course, because they invested in new ovens, made more cakes, and hired new part-time staff, the cost of doing business also rose. The net profit for 2012 was a slim $32,175. The salary for a professional desert baker averaged $70,000 per year in California.

Please examine the profit and loss statement on the next page, then answer the questions on pages 4 through 6.

Delicious Deserts, Incorporated Income Statement For The Year Ending December 31, 2012

Revenues

Gross Sales....................................................................$275,000

Less: Sales Discounts ..................................................$ 2,500

Less: Returns (Cancelled Weddings)...........................$ 2,000

Net Sales...............................................................................................$270,500

Cost of Goods Sold

Beginning Inventory (January 1).................................$ 18,000

Cost Of Ingredients To Bake Cakes............................$109,500

Total Cost of Goods For Sale......................................$127,500

Less: Ending Inventory December 31.........................$ 15,000

Costof Goods Sold..............................................................................$112,500

Gross Profit.....................................................................................................$158,000

Operating Expenses

Selling Expenses

Sales Commissions........................................$ 31,000

Advertising...................................................$ 16,000

Other Selling Expenses (Internet).................$ 18,000

Total Selling Expenses...............................................$ 65,000

General and Administrative Expenses

Professional & Office Salaries.................................$ 20,500

Utilities....................................................................$ 5,000

Office Supplies........................................................$ 1,500

Bank Interest Paid on Loans....................................$ 3,600

Insurance.................................................................$ 2,500

Rent (Fixed Cost)....................................................$ 17,000

Total General & Administrative Expense.............................$ 50,100

Total Operating Expenses..................................................$115,100

Net Profit Before Taxes..............................................................................$ 42,900

Less: Federal/State/Local Taxes................................................................$ 10,725

NET PROFIT.............................................................................................$ 32,175

The "A" student did a quarterly cost breakdown analysis for Delicious Deserts. A month-to-month analysis would have been better, but the owners just wanted a quick quarterly analysis. Q1 = 150 cakes sold, Q2 = 300 cakes sold, Q3 = 450 cakes sold and Q4 = 475 sold.

Quantity Sold

0

150

300

450

475

Demand/Price

$275

$275

$240

$180

$170

MR

$275

$205

$ 60

($ 10)

ATC

$238

$207

$153

$151

MC

$200

$175

$ 47

$283

TR

$41250

$72000

$81000

$80750

TC

$35750

$62000

$69000

$76075

Net Profit

$ 5500

$10000

$12000

$ 4675

Question #5
What is the MC=MR Profit Maximization point? What quantity should Delicious Deserts be producing at 'and' what price should they be charging to maximize their profits?

Question #6
Why isn't it a good idea for them to produce and sell as many cakes as they can? Is it more profitable to sell less cakes at this current stage of their business?

Question #7
Do you have any other recommendations for Delicious Deserts to increase their revenues, profits, market share, and client retention?

Solutions

Expert Solution

Answer :


Related Solutions

Goal: Please answer the questions below. The main goal of this homework is to see if...
Goal: Please answer the questions below. The main goal of this homework is to see if you can calculate the profit maximization point for this small wedding cake business. I hope that you will be able to merge your knowledge of basic accounting and microeconomic theory in order to calculate the profit maximization point, make comments about efficiency, and make logical recommendations to the firm's management to ensure their future success. Current Situation:The local wedding cake business was very competitive...
Goal: Please answer the questions below. The main goal of this homework is to see if...
Goal: Please answer the questions below. The main goal of this homework is to see if you can calculate the profit maximization point for this small wedding cake business. I hope that you will be able to merge your knowledge of basic accounting and microeconomic theory in order to calculate the profit maximization point, make comments about efficiency, and make logical recommendations to the firm's management to ensure their future success. Current Situation: The local wedding cake business was very...
Don't answer these questions, please. See below for a different question. The role of a manager...
Don't answer these questions, please. See below for a different question. The role of a manager is always changing. Though the traditional functions and roles of a manager are relatively easy to define, in practice it is impossible to predict what you as a manager will be required to do. 1) Arguably, managers are constrained by the environment in which they work. Discuss how decision making may well be influenced by a number of internal or external environmental factors impacting...
What is your view on this? Please see below. The board’s goal is targeted at improving...
What is your view on this? Please see below. The board’s goal is targeted at improving and establishing standards in terms of usability for all users and stakeholders combined with the effort of resolving government transparency and accountability. The world of finance and technology are complex and constantly evolving. In order for standards to remain relevant, we must keep up with that pace. Standards that have become outdated need to be reexamined; those standards are fundamentally interconnected with other standards...
What is your view on this? Please see below. The GASB's goal is targeted at improving...
What is your view on this? Please see below. The GASB's goal is targeted at improving and establishing standards in terms of usability for all users and stakeholders combined with the effort of resolving government transparency and accountability. The world of finance and technology are complex and constantly evolving. In order for standards to remain relevant, we must keep up with that pace. Standards that have become outdated need to be reexamined; those standards are fundamentally interconnected with other standards...
PRODUCTION HOMEWORK QUESTIONS PLEASE ANSWER ALL QUESTIONS AND PARTS! 1.What is the marginal product of labor...
PRODUCTION HOMEWORK QUESTIONS PLEASE ANSWER ALL QUESTIONS AND PARTS! 1.What is the marginal product of labor (MP or MPP)?  Why is the curve shaped the way it is? 2.Explain and describe each of the four production relationships. 3.Indicate whether each of the following are long-run or short-run choices.  Explain why. A law partnership signs a 5 year lease for an office complex. A jeans company asks its assembly-line workers to work an extra shift this week. A local oil refinery plans a...
Please see answer below. Can someone please explain how to get the answer with excel? Company...
Please see answer below. Can someone please explain how to get the answer with excel? Company C is seeking for help to decide this option to choose to upgrade their current bottleneck equipment. There are two vendors and one rental option. The cost details are shown in the table below. Option Vender R Vender T Rental Initial Cost 75000 125000 0 Annual Operation Cost 28000 12000 52000 Salvage Value 0 30000 0 Estimated Life in Year 2 3 Maximum 3...
Production and Costs Homework #5 Please answer all questions and each part The following information that...
Production and Costs Homework #5 Please answer all questions and each part The following information that apply to Lisa’s Cupcake Shoppe should be used to answer the questions. Quantity of Labor (workers) Quantity of cupcakes (TPP) MPP TVC TFC TC MC AVC AFC ATC 0 0 1 110 2 200 3 270 4 300 5 320 6 330 Lisa’s Cupcake Shoppe is a small shop that sells cupcakes in a university town. Lisa owns three mixers.  Her other inputs are ovens,...
Please answer the following questions in complete sentences. 1. What is a goal? 2. What is...
Please answer the following questions in complete sentences. 1. What is a goal? 2. What is strategic management? Why is it important to an organization?
Please answer all the questions. Thank you Use the following data to answer the questions below:...
Please answer all the questions. Thank you Use the following data to answer the questions below: Column 1 Column 2 Column 3 Y in $ C in $ 0 500 500 850 1,000 1,200 1,500 1,550 2,000 1,900 2,500 2,250 3,000 2,600 What is mpc and mps? Compute mpc and mps. Assume investment equals $ 100, government spending equals $ 75, exports equal $ 50 and imports equal $ 35. Compute the aggregate expenditure in column 3. Draw a graph...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT