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, 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 $900 per month.
• Utilities are estimated to be $150 per month.
• Fixtures for the business will cost $7,700 (depreciation will be $1,100 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 $750 per year.
• Advertising costs are expected to be $3,600 per year.
• Jay will invest $10,000 to start the business.

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) (10 points).
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 21,000 cupcakes and an expectation of a 15% profit, what is the maximum cost allowable for all expenses? (10 points).
3. Develop a price using cost-based pricing assuming that Jay expects to sell 21,000 cupcakes the first year with a 15% profit (10 points).
4. If the selling price is $3.25 per cupcake, what is the contribution margin per cupcake and contribution margin ratio (10 points).
5. At a selling price of $3.25 per cupcake, how many cupcakes need to be sold in order to break-even? What is the break-even in sales dollars? (10 points).
6. Based on a selling price of $3.25 prepare a cost/volume/profit graph (Hint: this is explained in Module 16) (20 points).
7. Based on the expected production of 21,000 cupcakes, calculate an overhead rate per cupcake (10 points).
8. Prepare a cash budget for the companys first year of operations based on sales of 21,000 cupcakes at a price of $3.25 per cupcake. Assume all sales are cash sales and that all costs and expenses are paid in cash. Rent, insurance, and advertising costs will be paid on a monthly basis. A minimum cash balance of $2,500 should be maintained (20 points).
9. Prepare the companys forecasted income statement for the year ended on 12/31/2020 based on the sale of 21,000 cupcakes at $3.25 per cupcake (15 points).
10. Prepare a forecasted balance sheet as of December 31, 2020 based on the sale of 21,000 cupcakes at $3.25 per cupcake (15 points).
11. Prepare a forecasted statement of cash flows for the year ended December 31, 2020 based on the sale of 21,000 cupcakes at $3.25 per cupcake (15 points).
12. Describe a minimum of three variances that Jay could analyze to monitor the business (minimum 200 words). (15 points)
13. Provide and explain at least 1 financial metric and 3 nonfinancial metrics that Jay could utilize to monitor the business using a balanced scorecard approach. (15 points)
14. For capital investments, which capital budgeting model would you recommend to Jay? Why? (minimum 200 words) (10 points)
15. What is your recommendation to Jay regarding this business venture? Provide an explanation incorporating the results of the calculations performed (200-300 words) (15 points).