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
A friend who is an excellent baker has decided to open a cupcake store to sell gourmet cupcakes. They have asked you if you will be interested in investing $50,000 for a 50% ownership interest. Using the skills you have developed in ACCT 551 Accounting for Managers, you will analyze the business to determine if you will invest in the company. The business is scheduled to launch on July 1, 2018. Your friend has provided you with the following cost information.
Anticipated selling price: $3.00 per cupcake
Cost information:
Cost of goods sold:
Ingredients are .25 per cupcake
Boxes and Cupcake Cups are .03 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 $100,000. 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 36 cupcakes per hour. Bakers are paid $18.00 per hour.
Store personnel are required for 56 hours per week and are paid $10.00 per hour.
Monthly rent, which includes utilities, is $1,200.
Business insurance is purchased at a cost of $750 per year.
Advertising costs are expected to be $5,000 per year.
Requirements:
Using separate tabs in a spreadsheet, provide your answers for the following.
What and how much are the variable costs? Present each item in cost per cupcake basis.
What and how much are the fixed costs? Present each item in total cost per year.
Write out the annual cost formula in Y = a + bX format.
You want to confirm that the anticipated selling price is reasonable. Research who the competition is and at what price they are selling gourmet cupcakes. Provide the detailed information for at least 3 competitors.
Develop a price using cost-based pricing assuming that you expect to sell 36,000 cupcakes the first year with a 15% profit.
For the following questions use the anticipated selling price of $3.00 per cupcake
Calculate contribution margin per cupcake and contribution margin ratio.
Calculate how many cupcakes need to be sold in order to break-even. Calculate how much sales in dollars are needed to break-even.
Prepare a cost/volume/profit chart.
Prepare the company’s forecasted income statement for the year ended on 6/30/2019 based on the sale of 36,000 cupcakes.
Based on the sale of 36,000 cupcakes during the first year of business, calculate the margin of safety and the operating leverage for the business. What do these figures tell you about how risky the business is?
If sales could increase by 10% (to 39,600 cupcakes), by how much in dollars would net operating income increase? By what percentage would net operating income increase? Use the formula for leverage to calculate.
Calculate how many cupcakes need to be sold in order to make a $30,000 target profit for the year.
Prepare a cash budget for the company’s first year of operations based on sales of 36,000 cupcakes. Assume all sales are cash sales and that all costs and expenses are paid in cash. Equipment will be purchased prior to the start of business using the investment of $50,000 plus the friend’s contribution of $50,000. Rent, insurance, and advertising costs will be paid on a monthly basis You decide to maintain a minimum cash balance of $5,000.
Will you invest $50,000 in your friend’s business? Based on the calculations performed explain why or why not.