Caicey’s Cupcakes

Caicey loves Cupcakes. Recently she has become interested in starting her own Cupcake
business. She will graduate from High School this spring with and has taken some classes in
Culinary Arts, and she wants to know whether a Cupcake business will be a feasible way for her
to help finance her tuition and book costs for Community College, where she will start business
classes in the fall.
Caicey has found some baking equipment for sale, and her mother, who runs a profitable
clothing boutique, is willing to loan her the money to buy it, and let her use some space in the
botique of her shop. Before she plunges into her business plan, she wants to do a feasibility
study to see if the idea is worth pursuing.
Caicey’s main question is: How many Cupcakes will she have to sell in order to pay for her
books and tuition? What Caicey needs to find out is her breakeven point, the level of sales she
will need in order to cover her costs.
A. Below are the costs Caicey anticipates for her business. First the costs must be divided
into two categories of costs either 1) Fixed Costs or 2) Variable Costs. Fixed Costs are
those that are constant regardless of how many cupcakes Caicey sells, she will have to
pay these costs no matter what. Variable Costs on the other hand are those that are
directly involved in producing the Cupcakes, and will change based on how many
Cupcakes are baked. Classify the expenses below as either Fixed Costs (FC) or Variable
Costs (VC).
 Icing
 Rent (for the space in her moms store)
 Loan Payment (to repay her mother)
 Cake Batter
 Eggs
 Milk
 Other Various Ingredients
 Phone
 Utilities – Sharing with her mom
 Owner’s draw – the amount she pays herself to cover Community College expenses
 Office Supplies

B. Now that you’ve divided Caicey’s costs between fixed costs and variable costs, your next
step is to figure out how much it costs Caicey to produce one Cupcake. She pays $0.20

per Cupcake for icing, $0.25 for cake batter per cupcake, $0.15 for eggs, $0.10 for milk,
and 0.50 for various other ingredients. How much does it cost Caicey to produce one
Cupcake.

If she sells each Cupcake for $3.75, how much money is left over, after her Variable
Costs? (This figure is the Contribution Margin per Cupcake.)

C. Next, Caicey has to compute her total fixed costs. First she calculates how much money
she will need to finance her tuition, books, and spending money at Community College,
and decides she will need $400 a month (the Owner’s Draw). What are her total fixed
costs per month?

Rent $100
Loan Payment $200
Phone $35
Utilities $ 50
Owner’s Draw $400
Office Supplies $15
Total Fixed Costs per month:

D. Calculate the number of Cupcakes that Caicey must sell each month to break even by
dividing the total fixed costs per month by the contribution margin contributed per
Cupcake: (Always round up, cannot sell part of a Cupcake)

Fixed Costs  Contribution Margin Per Cupcake = Number of Cupcakes needed to Break-Even

E. What would be Caicey’s monthly sales required to break even, in dollars? To calculate
this value, multiply the number of Cupcakes required to break even by the sales price
per Cupcake.

F. How many Cupcakes must Caicey sell per week to break even? Assume 4.3 weeks per
month (52 weeks / 12 months = 4.3 weeks per month)

How many Cupcakes must Caicey sell per day to break even? Assume 6 days per week.

G. Caicey is thinking about buying a car. She calculates that the car payment and insurance
will be about $300 a month. How many additional Cupcakes will she have to sell per
month if her owner’s draw increases $300 a month to cover the costs of her car?

H. Caicey decides not to purchase a car at this time, but she has found a small downtown
storefront location where she believes she can sell more Cupcakes. Her rent will
increase to $500 per month, and to help attract customers, she plans to spend $100 per
month on advertising. Plus she has started buying her eggs in bulk and now it only costs
Caicey $0.05 in eggs per cup cake. What will be the new breakeven point in number of
Cupcakes per month at the downtown location considering these new expenses?

I. If sales go as expected at the downtown location, Caicey will be able to batter and icing
in higher quantities and will reduce the cost to $0.10 for icing per cupcake, and $0.15
per cupcake in batter. How will this affect her breakeven point? How many cupcakes
would she have to sell to break even each month?

 Break-Even Formula = Fixed Costs divided by Contribution Margin
 Contribution Margin = Selling Price minus Variable