Although business was off to a good start in January, Keisha realized that she w

Question

Although business was off to a good start in January, Keisha realized that she will need to be profitable in order to continue as a viable business. Keisha discussed the subject of profitability with her accountant who suggested that she first needs to determine her breakeven point in both unit sales and dollars. He explained to her that breakeven is the point where all costs are covered by sales and profit is equal to zero. He also suggested that the company should establish a monthly target profitability in order to determine the amount of cakes it would need to sell to achieve this level.

Since Keisha did not know how to perform this calculation and in order to save money, she asked you to calculate the company’s breakeven point and the target sales needed to achieve a monthly profit of $700.

Required: Calculate K&J Bakery Inc’s breakeven point in both units and sales dollars. Also calculate the sales needed in order to achieve a monthly profit of $700.                                                                   

Note: Use four decimal places in converting from total to per unit cost.

Calculate K&J Bakery Inc’s breakeven point in both units and sales dollars. Also calculate the sales needed in order to achieve a monthly profit of $700.  

Business Backgrou As she sat in her Accounting I class, bored while listening to the lecture on journal entries, Keisha Jones could not imagine being an accountant in the future. As a young girl, she remembered sitting in the kitchen while her mom and aunts baked those delicious Jamaican black cakes. She remembered that the cakes sold very quickly especially at Christmas time and that people were traveling from as far away as Florida to buy them. Her mom learned to bake from her mother, and she wrote down the cake recipes in case Keisha or one of her siblings decided to follow in her footsteps. However, Keisha chose to follow in her dad's path and so she enrolled in college with plans to become an accountant. Her two older sisters where already studying to be a lawyer and dentist. Keisha had an epiphany as she sat in class, she would leave school at the end of the semester to open up a bakery specializing in Jamaican black cakes. Keisha anticipated that most of her business would be based on special order, customized cakes. She anticipated selling cakes for family weekend gatherings, birthday, wedding celebrations, and holiday gatherings. She wanted to have a few cakes available in a store to appeal to the drop in customer In December 20X0, Keisha followed her plans; she dropped out of college, created a business plan, and incorporated as the K& J Bakery Inc. (K&J;). The J is in honor of her mom, Jezebel who passed away earlier in the year. Keisha planned to open her business on January 1, 20X1. She would use the $50,000 inheritance from her mom as startup capital and receive a minimal salary of $500 per month for the first year of business. Uncle David, a marketing executive with a national bank, agreed to provide her with marketing support pro-bono. Keisha found the perfect location for her business. A take-out restaurant on the busy intersection of Jamaica and Hillside Avenues in Queens, NY, became available after a bitter divorce between the owners. The landlord was impressed with Keisha's vision and agreed to pay for all renovations and charge her $650 per month for rent.

Explanation / Answer

Monthly fixed cost = oven cost per month + others cost + utilities + mobile phone + salary Keisha + Salary aunt + Accountant + Rent

= 6000/(5*12)+30+50+50+500+100+100+650

= $ 1580 per month

Variable cost per cake = baking flour + eggs + sugar + butter + raisins + rum + salary nieces + estimated MOH   (baking soda standard use per cake is not provided in the question, so its cost is ignored)

= (24/8)*1 + (2/12)*4 + (15/25)*1 + (6.5/4)*1 + (8/2)*0.5 + 12*1/4 + 4

= $ 14.89

Breakeven point in units (monthly sales) is calculated by the following formula = Monthly fixed cost / (Selling price - Total variable cost)

Monthly fixed cost and total variable cost are computed above. Selling price of the cake is not given in the question.

Sales in order to achieve a monthly profit of $ 700

= (Monthly fixed cost + profit needed of $ 700) / (Selling price - Total variable cost)

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