You will assume the role of an entrepreneur starting a small company. Your compa

Question

You will assume the role of an entrepreneur starting a small company. Your company will produce and sell gourmet cupcakes through a storefront in a location of your choice. Your business is scheduled to launch on January 1, 2018.

Cost information:

Cost of goods sold:

Ingredients are .30 per cupcake

Boxes and Cupcake Cups are .05 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 $140,000. 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 24 cupcakes per hour. Bakers are paid $15.00 per hour.

Sales personnel are required for 56 hours per week and are paid $10.00 per hour.

Monthly rent, which includes utilities, is $1,500.

Business insurance is purchased at a cost of $1,000 per year.

Advertising costs are expected to be $6,000 per year.

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Develop a price using cost-based pricing assuming that you expect to sell 24,000 cupcakes the first year and would like to have a 20% profit (10 points).

Prepare a contribution format income statement assuming sales of 39,600 cupcakes

Calculate how many cupcakes need to be sold in order to make a $50,000 target profit for the year

Explanation / Answer

Cost based pricing for 24000 cup-cakes at 20% profit: Cost of Ingredients (24000*0.30) 7200 Bakes and cup cake (24000*0.05) 1200 Labor charges to bakers (24000/24)*15 15000 Charges to sales personnel (52 weeks*56*10) 29120 Monthly rent (1500*12) 18000 Business insurance 1000 Advertising cost 6000 Depreciation (140000/10) 14000 Total cost 91520 Add:Profit at 20% 18304 Total sales revenue 109824 Selling price per unit=109824/24000=$4.58 per unit Contribution format income statement: Sales (39600*4.58) 181368 Less:Variable cost Ingredients (39600*0.30) 11880 Bakes and cup cake (39600*0.05) 1980 Labor charges to bakers (39600/24)*15 24750 38610 Contribution 142758 Less:Fixed cost Charges to sales personnel (52 weeks*56*10) 29120 Monthly rent (1500*12) 18000 Business insurance 1000 Advertising cost 6000 Depreciation (140000/10) 14000 68120 Profit 74638 contribution per unit=sales-Variable cost Sales price per unit=$ 4.58 Variable cost per unit=0.30+0.05+(15/24)=0.98 Contribution per unit=4.58-0.98=3.6 Cup cakes need to be sold to make $50000 target profit=(Fixed cost+Desired profit)/contribution per unit=(68120+50000)/3.6=32811 cupcakes

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