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$ 68,120.00 --------------------------------------------------------------------

ID: 2581853 • Letter: #

Question

$                        68,120.00

-------------------------------------------------------------------------------------------------------------

Develop a price using a target price (what do you think a customer will pay for one of your cupcakes? What are other companies charging for gourmet cupcakes?) Provide support for your target price (10 points).

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).

Using the price you calculated using cost based pricing in #6, calculate contribution margin per cupcake and contribution margin ratio (5 points).

Based on the price you calculated in #6, calculate how many cupcakes need to be sold in order to break-even. Calculate how much sales in dollars are needed to break-even (10 points).

Sweet Creations Bakery Variable Cost Ingredients $                                  0.30 Boxed and cupcake cups $                                  0.05 Baker's wage ($15/24) $                                  0.63 Variable cost per cupcake $                                  0.98 Depreciation $                        14,000.00 Sales personnel salaries $                        29,120.00 Rent $                        18,000.00 Insurance $                           1,000.00 Advertising $                           6,000.00 Total fixed cost for the year

$                        68,120.00

Explanation / Answer

A. ( Note : The requisite information such as competitiors information etc. is not given in the question so target price can not be calculated. However other parts of the question are solved below)

B . Price = total cost + required profit

= total variable cost + total fixed cost + required profit

= $ 1.96 * 24,000 + $ 68120 + 20% of sales(i.e 25% of total cost)

= $ 115,160 + 25% of $ 115,160

= $ 143,950 or $143,950/ 24,000 i.e. $ 6 per cupcake

C. Contribution Margin per cupcake = Selling price per cupcake - total variable cost per cupcake

= $ 6 - $ 1.96

= $ 4.04

Contribution Margin Ratio = Contribution Margin per cupcake*100 / Selling price per cupcake

= $ 4.04*100 / $ 6

= 67.33%

D. Cupcakes need to be sold in order to Break Even = Total Fixed Cost / Contribution per cupcake

= $ 68,120 / $ 4.04

= 16,862 cupcakes

Sales in dollars needed to break-even = Total Fixed cost / contribution margin ratio

= $ 68,120 / 67.33%

= $ 101,172

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