Business Description

A friend, Jay Green, is considering opening a cupcake store to sell gourmet cupcakes. Jay has asked you to help with formulating the projected numbers for the business and help analyze if the company will be successful. Using the skills you have developed in ACCT 551 Accounting for Managers, you will analyze the business to determine if you will recommend to Jay whether or not to enter into the business venture. Jay plans to launch the business on January 1, 2020. Following is the cost information provided by Jay:

Cost information:

• Jay plans to hire a baker that will charge $12 per dozen cupcakes.
• Jay has found a location near downtown that may be rented for $1,200 per month.
• Utilities are estimated to be $150 per month.
• Fixtures for the business will cost $8,400 (depreciation will be $1,200 per year for 7 years)
• Jay plans to open the store 7 days per week from 10:00 AM until 6:00 PM. Sales people will be paid $10.00 per hour.
• Business insurance will be purchased at a cost of $720 per year.
• Advertising costs are expected to be $2,400 per year.

Requirements:

Using separate tabs in a spreadsheet, provide your answers for the following.

1. Develop the annual cost formula in Y = a + bX format, i.e. Total Costs = Fixed Costs + (Variable Cost per Unit times number of units)
2. You want to help Jay set a selling price for the cupcakes. Research who the competition is and at what price they are selling gourmet cupcakes (this will provide a base for a target price). Provide the detailed information for at least 3 competitors. Based on the projection of selling 24,000 cupcakes and an expectation of a 15% profit, what is the maximum cost allowable for all expenses?
3. Develop a price using cost-based pricing assuming that Jay expects to sell 24,000 cupcakes the first year with a 15% profit
4. If the selling price is $3.50 per cupcake, what is the contribution margin per cupcake and contribution margin ratio
5. At a selling price of $3.50 per cupcake, how many cupcakes need to be sold in order to break-even? What is the break-even in sales dollars?