Case Study - FACTS SET

• Jane Fleming is considering investing in a new cupcakes franchise business. Jane has provided you with the following data

o Market research suggests you can sell the cupcakes for an average price of $3 each.
o Under the franchise agreement she would have to pay a royalty payment equal to 8% of sales.
o She would also have to contribute 5% of sales towards the marketing costs of the franchisor.
o Cost of ingredientsper cupcake is $0.38
o Weekly rental $350, plus annual outgoings of $3,500.
o Wages: Shop assistant $16 per hour; baker $17 per hour
o Superannuation: 9.5% of wages

• Assume the shop assistant and the baker work for 8 hours per day, for 252 days of the year.

TASKS-

1. What is the contribution margin?

2. How many cupcakes must Jane sell in a year in order to break even?

3. If you can sell all the cakes the baker can produce in an eight-hour shift (144 cupcakes) each day for 252 days of the year, what will be the annual pre-tax profit before tax?

4. If you increase your average selling price to $3.70, which has the effect of reducing the amount you are able to sell from 144 per day to 134 per day, what will be your annual pre-tax profit or loss?

5. If you reduce the selling price to $2.70 and employ an extra baker (producing at the same rate per 8-hour shift) in order to cater for the extra demand at the lower price, and if you wish to earn a pre-tax profit of $10,000 per annum, how many would you need to sell per year?