The purpose of this case study is to help you integrate the managerial accountin
ID: 2582727 • Letter: T
Question
The purpose of this case study is to help you integrate the managerial accounting concepts that were covered in class and apply them to a real-world business setting. Business Description 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: 1 Cost of goods sold: a. Ingredients are .30 per cupcake b. Boxes and Cupcake Cups are .05 per cupcake 2 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. 3 On average one person can make, bake, and decorate 24 cupcakes per hour. Bakers are paid $15.00 per hour. 4 Sales personnel are required for 56 hours per week and are paid $10.00 per hour. 5 Monthly rent, which includes utilities, is $1,500. 6 Business insurance is purchased at a cost of $1,000 per year. 7 Advertising costs are expected to be $6,000 per year.
6 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).
7 Using the price you calculated using cost based pricing in #6, calculate contribution margin per cupcake and contribution margin ratio (5 points).
8 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).
Explanation / Answer
6. First we will have to compute costs for the entire year:
Cost of goods sold per cupcake = 0.30+0.05 = 0.35 per cupcake. Cost for 24,000 cakes = 24,000*0.35 = $8,400
Depreciation costs for equipment per year = $140,000/10 years = $14,000 per year
No. of hours required for making, baking and decorating the cake = 24,000 cakes/24 cakes per hour = 1,000 hours. Thus cost of bakers = 1,000 hours*$15 per hour = $15,000
Cost of sales personnel = 56 hours per week*52 weeks*$10 per hour = $29,120
Cost of rent = 1500*12 months = $18,000
Cost of insurance = 1,000 and cost of advertising = 6,000
Total annual costs = 8400+14000+15000+29120+18000+1000+6000 = $91,520
20% profit = 20% of 91,520 = $18,304
Thus price = cost+20% profit = 91,520+18,304 = $109,824. This is the total price of 24,000 cupcakes. Price of 1 cupcake = 109,824/24,000 = $4.58
7. Contribution margin = sales - variable costs. Here variable costs are cost of goods sold and cost of baking.
Cost of goods sold per cake = $0.35 (as computed in "6" above). Cost of baking per cake = $15/24 cakes = $0.63
Thus total variable costs = 0.35+0.63 = $0.98
Contribution margin = 4.58 - 0.98 = $3.60
Contribution margin ratio = contribution margin/sales = 3.6/4.58 = 78.69%
8. No. of cupcakes to be sold for breakeven = fixed costs/(sales price per cake - variable cost per cake)
= (14000+29120+18000+1000+6000)/(4.58-0.98)
= 68120/3.60
= 18,916.97 or 18,917 cupcakes per year
Breakeven sales in dollars = fixed costs/contribution margin ratio = 68120/78.69%
= $86,564 (rounded off to the nearest dollar)
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