Vivian Lopez and Loren San will be opening a pastry store called Tasty Desserts. They are opening in two weeks and have still not decided how much to charge for their cakes and how much they should spend on advertisements and promotions. The following information is available:

Tasty Desserts variable costs per cake $ 11.00 Tasty Desserts fixed costs for the year $ 13,000 Maximum production capacity for the year 5,000 Tasty Desserts selling price per cake ? Advertising budget ?

Competitors selling price per cake (similar to Tastys) $ 21.00

The two owners had the following discussion regarding the selling price and advertising budget: Vivian: Opening day is in two weeks! Loren, we really need to figure out how much well be selling our cakes for and our advertising budget. Loren: As a new store, I think we should charge the same rate as our competitors and advertise our store on the radio and local review blogs. I anticipate that these advertising expenses will increase our fixed costs by $4,000. Vivian: Well, I think the best way to attract customers is to sell our cakes cheaper than anyone else. Im thinking we should charge 10% lower than our competitors rate. As for advertising, I dont think we need to spend money on advertisements at all. We can simply create a Facebook group and invite a bunch of friends and families. This way, we will generate more sales. In fact, I think we can potentially increase sales by 2,000 cakes. Loren: I agree that we will probably sell more cakes if we charge 10% lower than our competitors. However, I dont think we will be able cover our fixed costs if we reduce our prices. We should also be concerned with breaking even as quick as possible.

Part a) Calculate the break-even selling price and graph the break-even point. Part b) Calculate profit if Plan Loren is implemented. Part c) Calculate profit if Plan Vivian is implemented. Part d) Comment on which strategy should be implemented and why. Also comment on your recommendation for Tasty Desserts.