Question

"Consider Mollys cupcakes in downtown Manhattan, New York City. Variable costs for 1 dozen speciality cupcakes is $14. A dozen cupcakes sells for $24. Her rent for the bakery and front retail shop is $6,000 per month."

Contribution margin per dozen cupcakes= $10

b) If Molly's Cupcakes sells an average of 50 dozen cupcakes today, what is her total contribution for an average day? c) What is the break-even volume? What is the break-even revenue? d) Molly is considering moving to a new bakery with a new rent of $3,200 but increased cost of making the cupcakes of $16 per dozen. Assume Molly can continue to sell cupcakes at 50 dozen per day (at least), 20 days a month (1000 dozen cupcakes a month). a. Based on the speed (#work days needed) of breaking even, should Molly move? (Hint: Calculate how many days it took her to breakeven at her current location compared to this new location) breakin days it "lo this b. What is her monthly profit at her current location compared to this new proposed location? Molly knows she can at least sell 1000 dozen cupcakes a month with no risk at either location. c. Considering monthly profit and breakeven point together, should Molly move? Why or why not? Justify your choice.

Answer 1

1. Contribution = selling price - variable cost = 24-14 = 10

Contribution per day = 10*50 = 500

2. Break even = Fixed cost / contribution per unit

= 6000/10 = 600 dozen per month

Break even sale = 600*24 = 14,400

3. Current operating days for breakeven = 600/50 = 12 days

Break even volume at new location = 3,200/ 8 = 400

New minimum Operating days = 400/50 = 8 days

4. expected volume = 1000 dozen

Existing location = (1000*10) -6000 = 4000

New location = (1000*8)-3200 = 4800

5. Molly should move to New location as the break even at new location is lower and profits at new location are higher with the same volume.