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Based on the sale of 36,000 cupcakes during the first year of business, calculate the margin of safety and the operating leverage for the business. What do these figures tell you about how risky the business is? (15 points)

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Business Description

A friend who is an excellent baker has decided to open a cupcake store to sell gourmet cupcakes. They have asked you if you will be interested in investing $50,000 for a 50% ownership interest. Using the skills you have developed in ACCT 551 Accounting for Managers, you will analyze the business to determine if you will invest in the company. The business is scheduled to launch on July 1, 2018. Your friend has provided you with the following cost information.

Anticipated selling price: $3.00 per cupcake

Cost information:

Cost of goods sold:

Ingredients are .25 per cupcake

Boxes and Cupcake Cups are .03 per cupcake

Equipment that will be required to be acquired at the start of business includes ovens, racks, display case, counter, cash register, and other baking equipment and will cost $100,000. The equipment is expected to last 10 years without salvage value. Straight-line method of depreciation should be used.

On average one person can make, bake, and decorate 36 cupcakes per hour. Bakers are paid $18.00 per hour.

Store personnel are required for 56 hours per week and are paid $10.00 per hour.

Monthly rent, which includes utilities, is $1,200.

Business insurance is purchased at a cost of $750 per year.

Advertising costs are expected to be $5,000 per year.

Requirements:

Provide your answers for the following

For the following questions use the anticipated selling price of $3.00 per cupcake

Calculate contribution margin per cupcake and contribution margin ratio (10 points).

Calculate how many cupcakes need to be sold in order to break-even. Calculate how much sales in dollars are needed to break-even (10 points).

Prepare a cost/volume/profit chart (15 points).

Prepare the company’s forecasted income statement for the year ended on 6/30/2019 based on the sale of 36,000 cupcakes (10 points).

Based on the sale of 36,000 cupcakes during the first year of business, calculate the margin of safety and the operating leverage for the business. What do these figures tell you about how risky the business is? (15 points)

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Solution

1.Based on the Break even point calculated above the margin of safet @36000 units will be:

Margin of safety = Actual Sales- Break even Point

$108,000-$80094=$279006

In units it will be $27006/3=9302 units

2. Calculating Operating Leverage

=(Sales- variable Cost)/Profits

=79920/20650

=3.87

Operating leverage is a financial effeciency ratio use to see what percentage the total cost is of fixed cost and what % is of variable cost. As form the working we clearly see that fixed cost is way more then the variable cost because of this the firm will generate large prfofit from each incremental sales after the break even point is achieved. This is very good position from the orgination point of view.

The Whole Question Was solved from the working Mentioned above in the question.