Fixed Costs and Contribution Margin Assignment
CASE SYNOPSIS
Sweet Treats is a small, local bakery owned and operated by cake designer, Riley. Sweet Treats serves cakes, cupcakes, house-made ice cream, coffee and an assortment of baked goods as well as custom ordered cakes for special occasions. Riley opened her storefront in 2014 but is searching for ways to grow her business. After hiring a consultant and using information from this as well as information based on a market study, Riley made the decision to open a food truck it the local community and to focus on two products. Riley needs a cost-volume-profit analysis to support her decision for a food truck.
CASE BODY
Sweet Treats is located in a rural part of the southeastern United States in a town with a population of approximately 20,000. There is also a university located down the street from Sweet Treats but not within walking distance. The three largest employers in town are a Tribal Nation, a large regional bank and their corporate headquarters and a distribution center for a well-known retailer. In addition, the Tribal Nation has a large independent construction company located on-site that will be there for approximately three years. A food truck area has recently opened in town and currently does not have dessert or coffee selections. There is a larger town within 20 miles that has just opened a food truck park, as well.
Riley’s passion is business and her niche is her bakery. Riley would like to do more managing and less baking and therefore is looking for a way to train employees to create products that will continue to build her business but not tie her to the kitchen working on customized cakes. Cupcakes and coffee are both very popular due to the millennial’s desire for customization and “grab and go” options. Popular television shows like Cupcake Wars, Two Broke Girls and Fixer Upper highlight cupcakes and result in a trend for this market.
A recent consultation resulted in the recommendation that Riley opens a food truck with her two most popular products – cupcakes and coffee. She knows the market price for cupcakes and coffee but needs to know if and how much her profit will be if she follows the advice of her consultant. Riley currently has $5,000 of retained earnings from the bakery to invest in this venture but will need to borrow the additional capital at an annual rate of 4.5% through a small business initiative in her state of residence.
Riley’s current employees can make the cupcakes at her shop but she needs to hire someone to run the food truck and work as a barista in the food truck. She thinks she can move from location to location and operate Monday-Saturday from 6:00 a.m. to 3:00 p.m. with just two workers at a time in the truck.
Breakeven is calculated for a product mix with the use of total fixed costs and contribution margin for each item. You will need to do some market research to set a sales price for cupcakes and coffee.
CASE STUDY QUESTIONS
Answers will vary
- What costs should Riley consider for her food truck venture? What costs are fixed? What costs are variable? Estimate each cost.
- Based on your answer to question #1, what is Riley’s breakeven units for cupcakes and coffee if she expects a 50/50 split between the two? What is she expects that 25% of her sales are cupcakes while 75% are coffee?
- If Riley’s market analysis indicates that she can sell 2,000 cups of coffee and 3,000 cupcakes monthly, what is her margin of safety?
- Should Riley purchase the food truck? What other factors should she consider?
