VP Analysis at Mollys Cupcakes1 B Recall Mollys information

VP Analysis at Molly\'s Cupcakes1 (B) Recall Molly\'s information $34,000 37,100 Revenue - Expense Profit (loss) S3,1002 Management responded with the following information Costs have been matched to revenue to determine what costs should appear as expenses. The costs of goods remaining in inventory are not included in expenses. . There are no fixed manufacturing costs. Cost of sales is 40% of revenue $8,500 of the selling and administrative expenses are variable Costs and selling prices are expected to remain stable for at least the next two years. Based on this information you created the following contribution margin format income statement and used it to analyze several alternatives for management. 0 Revenue Revenue Variable COGS Variable S&A; CM Fixed Cost Profit 34,000 13,600 40.00% 8,500 25.00% 11,900 35.00% 15,000 44.12% 3100-91296 Management is now wondering how sales mix will affect their financial picture. It provided the following information. The current sales mix, computed as percent of total units, is 80% regular cupcakes and 20% deluxe cupcakes. The total number of cupcakes currently being sold is 10,000 . Regular cupcakes sell for $3.00 and have a contribution margin of $0.95 per unit. . Deluxe cupcakes sell for $5.00 and have a contribution margin of $2.15 per unit. Management believes it can increase sales of deluxe cupcakes by rearranging the display case. Its best estimate is that deluxe cupcakes would increase to 48% of cupcakes sold t believes it will continue to have the same number of customers and sell the same number of cupcakes.

Solution

8.

9.

10.

Scenario 1:

Total sales = 3*5200+5*4800 = $39,600

Break - Even point in sales dollars = 15,000*(39,600)/15,260 = $38,925.29

Margin of safety percentage = (39600- 38925.29)*100/39600 = 1.70%

Operating leverage = 15260/15000 = 1.02

Profit sensitivity due to change in product mix = 260- (-3,100) = $ 3,360

Scenario 2:

Total sales = 7,800*3+7,200*5 = $ 59,400

Break - even point in sales dollars = 25000*59400/33,330 = $ 44,554.46

Margin of safety percentage = (59400-44554.46)*100/59400 = 24.99 %

Operating leverage = 33330/25000 = 1.33

Profit sensitivity due to the decision = 8330- (-3,100) = $ 11,430

11.

Scenario 2 has greater risk due to introduction of new machine and estimated increase in sales

12.

Scenario 1:

Increase in sales by 30%

Total contribution = 15260*1.30 = $ 19,838

Profit = 19838-15000 = $ 4,838

Decrease in sales by 30%

Total contribution = 15260*0.70 = 10,682

Profit = 10683-15000 = (-) 4,318

Scenario 2:

Increase in sales by 30%

Total contribution = 33330*1.30 = $ 43,329

Profit = 43,329-25000 = $ 18,329

Decrease in sales by 30%

Total contribution = 33330*0.70 = 23331

Profit = 23331-25000 = (-) 1,669

13.

Let x be the total optimal mix

Thus,

0.95*.52x+2.15*.48x-15000= 1.55*.52x+2.15*.48x-25000

or x = 32051

Units of regular cupcakes = 16,667

Units of deluxe cupcakes = 15,385

Particulars	Regular Cupcakes	Deluxe Cupcakes	Total
Price per unit (In $)	3	5
Contribution Margin (In $)	0.95	2.15
Estimated Sales	5,200	4,800	10,000
Estimated Contribution (In $)	4,940.00	10,320.00	15,260.00
Less: Fixed cost (In $)			15,000.00
Net Operating Income (In $)			260.00