Mollys Cupcakes management is trying to decide whether to st

Molly\'s Cupcakes management is trying to decide whether to stay in business. They are currently losing money. They want to know how close they are to making a profit. They are also considering a couple of alternatives in their quest for profitability Molly\'s provided the following information from the most recent monthly financials: Revenue Expense Profit (loss $3,1002 $34,000 37,100 When talking to Molly\'s management, you first asked two questions to help you understand the data provided: (1) What costs are included in expenses? (2) How do these costs behave? 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. . ·

Solution

Solution 1:

Sales = $34,000

Total Expense = $37,100

Cost of Sales (Variable) = 40% of Revenue = 40% of $34,000 = $13,600

Selling and adminstrative expense = $37,100 - $13,600 = $23,500

Variable Selling and administrative expense = $8,500

Fixed Selling and administrative expense = $23,500 - $8,500 = $15,000

Impact on profit from this alternative = Revised Profit - Existing profit = -$1,720 - (-$3,100) = $1,380

Hence profit will be increased by $1,380 by this alternative.

break even point = Fixed cost / Contribution margin = $16,000 / 35% = $45,714.28

Margin of Safety = (Current Sales - Breakeven Sales) = $40,800 - $45714.28 = -$4,914.28

Margin of safety percentage = (Current Sales - Breakeven Sales) / Current Sales =  -$4914.28 / $40,800 *100 = 12.04%

Solution 2:

Impact on profit from this alternative = Revised Profit - Existing profit = $3,500 - (-$3,100) = $6,600

Hence profit will be increased by $6,600 by this alternative.

Revised contribution margin = $17,000 / $34,000 = 50%

break even point = Fixed cost / Contribution margin = $13,500 / 50% = $27,000

Margin of Safety = (Current Sales - Breakeven Sales) = $34,000 - $27,000 = $7,000

Margin of safety percentage = (Current Sales - Breakeven Sales) / Current Sales = $7,000 / $34,000 *100 = 20.59%

Solution 3:

Net increase in income under cost cutting alternative is higher than increase in income under advertising alternative, therefore i will recommend Molly\'s cupcakes should go for cost control.

Income Statement - Molly\'s Cupcakes
Particulars	Amount
Sales	$34,000.00
Variable Cost:
Cost of Sales	$13,600.00
Variable Selling and Administrative expense	$8,500.00
Contribution	$11,900.00
Fixed Selling and Administrative expense	$15,000.00
Profit (Loss)	-$3,100.00