Case Study

                                                                                            Scenario 01                                                                                             

Read the following case and answer the questions asked.

Eric considers that the profit and the rate of return are very attractive, but he is weak in accounting.  Help Eric by solving the following questions?

Question 01: Calculate the contribution margin per unit of cake.

Question 02: Identify the fixed costs and find total fixed costs per month.

Question 03: Calculate profit earned in each month and annual profit.

 

                                                                                  Scenario02                                                                                                 

Read the following paragraph and make recommendations to Eric.

Should Eric acquire the cake shop? Help Eric by answering the following questions.

Question 04: Calculate units of cakes to be sold per month to break even.

Question 05: Calculate the margin of safety to determine the “cushion” before incurring a loss if the expected sales fail to materialize. Express this measure in percentage.

 

                                                                                 Scenario03                                                                                                 

There is a chance that the supplier will increase the price of each cake from $6 to $7.5, but in Mary’s opinion, the selling price could only be increased by $1 to maintain the existing sales volume.

Help Eric in figuring out the impact on the annual profit if this new situation occurs by answering the following questions?

Question 06: Calculate the new unit contribution.

Question 07: Calculate the new annual profit.

Question 08: Calculate the new BEP in units.

Question 09:  Calculate the new margin of safety in units. Express this measure in percentage too.

Question 10: Provide comments on the new Margin of safety.

 

                                                Scenario04 – Acceptance of a proposal                                                                            

Refer to the original cost figures of scenario 01. Now assume, Eric receives a proposal from Mary after he acquired the cake shop.  You are now required to help Eric to analyze the proposals and determine whether to accept it or not.

Mary’s Proposal

If the company spends $10,000 per month in advertising, the monthly sales volume will increase by 10,000 units.

Eric performs a calculation and finds that the unit cost will increase from$9 to $10 and concludes that profit will remain unchanged if the proposal is implemented.  Eric’s calculation                      Total fixed cost per month                =          $30,000 Fixed cost per unit                              =          $30,000 / 10,000 units =          $3 Variable cost per unit                         =          $6 Total cost per unit                               =          $3 + $6 = $9   Additional expenditure                     =          $10,000 Additional cost per unit                    =         $10,000 / 10,000 units =         $1   Cost per unit                                         =         $9 + $1 (on additional sales)                           =         $10   Profit per unit                                      =         Selling price – unit cost =         $10 – $10 =        Nil

Question 11: What is wrong with Eric’s calculation? Help Eric make the right decision on accepting the proposal. Should Eric accept the proposal?

 

                                                         Scenario05 – Solving Business Problem                                                                

One year after Eric acquired the cake shop business …………..

Without implementing the proposal made by Mary in Scenario 4, the profit for the first year of operation is $120,000 as expected.  After receiving the letter, Eric asks you how this change will affect the company’s annual profit (do not consider changes of scenario 3 & 4).

Question 12:  What is the change to fixed costs?  How does it affect the annual profit, BEP, and margin of safety? Advise Eric on this issue.    

 

                                       Scenario06 – Adding chocolate mix topping on the cake                                                  

Eric has a plan to develop his business.  His wife has a special chocolate mix recipe.  He plans to add chocolate topping on the cake, using his wife’s special recipe.

 

Special recipe on the cake:
Add chocolate topping on the cake.

Eric expects the new production unit selling price to increase by $1 and the monthly sales volume to increase to 11,000 units.  The supplier of the cake will give Eric a 5 % discount on 11,000 units per month.

Extra costs:

• New baker’s salary to prepare the chocolate mix:$9,500 per month
• Cost of chocolate mix: $0.5 per unit
• To publicize the new product, 5,000 flyers are $0.5 per flyer distributed in order to achieve the target sales volume.

Question 13: Advice Eric whether he should carry out the plan. Please help Eric calculate the new variable costs and monthly fixed costs for the new product. (Hint: What is the new unit purchase price if the discount is taken?  Think whether the chocolate mix, baker’s salary and the cost of flyers are variable or fixed costs.)

Please help Eric calculate the break-even point, margin of safety in units and percentage, annual profit if the new product is launched. What is your recommendation to Eric?