Scenario At A Recent Get-Together A Longtime Friend Brought

Scenarioat A Recent Get Together A Longtime Friend Brought Various Ty

At a recent get together, a longtime friend brought various types of cookies as a dessert. You had never tasted cookies of this high caliber before. Your friend never thought anything special of the cookies given she has been baking these since she was a small child. You shared that “Cookies from Home," a profitable company based in Tempe, Arizona, started by the encouragement of friends. Intrigued, your friend stated she would like to learn more.

She would like some assistance in understanding how to start and operate a business of this nature. In exchange for a 2% ownership in the company, you agree to help her develop a business plan so that she can start her own business baking, marketing, and selling these cookies. Write the portion of the business plan for this company addressing the following: Explain the process of determining the breakeven point for a business. Estimate monthly fixed costs to establish this company including equipment, rent, insurance, and other fixed costs. Estimate variable costs per batch of cookies, identifying all variable costs. Given the estimated costs, calculate the breakeven point and identify required sales revenue to reach this point. Based on the costs identified above, develop a realistic proforma income statement of a profitable business venture which would pay your friend a salary of $50,000 per year.

Paper For Above instruction

The development of a comprehensive business plan is essential for the successful launch and operation of any small business, especially one centered around baking and selling cookies. A critical component of this plan involves understanding the breakeven point—where total revenues equal total costs—ensuring the business can sustain itself and generate profits.

Understanding the Breakeven Point

The breakeven point (BEP) is the level of sales at which total revenues exactly cover total costs, resulting in neither profit nor loss. Calculating the BEP involves analyzing fixed and variable costs. Fixed costs are expenses that remain constant regardless of sales volume, such as rent, equipment, and insurance. Variable costs fluctuate with production volume, including ingredients, packaging, and labor per batch. The breakeven point can be mathematically expressed as:

BE = Fixed Costs / (Unit Selling Price - Variable Cost per Unit)

This formula highlights the importance of setting an appropriate selling price to ensure profitability at different sales volumes.

Estimating Monthly Fixed Costs

To establish the cookie business, fixed costs need to be accurately estimated. These include:

  • Equipment: Cost of ovens, mixers, baking sheets, cooling racks – approximately $10,000 amortized over the lifespan (say, 5 years), which translates to $167 per month.
  • Rent: A commercial kitchen or bakery space—estimated at $1,200 per month.
  • Insurance: Business insurance covering property, liability, and worker’s compensation—$200 monthly.
  • Utilities: Electricity, water, and gas—around $300 per month.
  • Licenses and permits: Approximate annual costs of $600, or $50 per month.
  • Marketing and advertising: Estimated at $200 monthly.
  • Miscellaneous fixed costs: Cleaning supplies, administrative expenses—$183 per month.

Adding these together, the total estimated fixed costs are approximately $2,300 per month.

Estimating Variable Costs Per Batch

Variable costs vary with production volume and for cookie baking typically include:

  • Ingredients: Flour, sugar, butter, eggs, chocolate chips, and other flavorings—$10 per batch.
  • Packaging: Cookies require boxes, wrappers, or bags—$2 per batch.
  • Labor: Assuming a skilled baker, labor per batch might be valued at $15.
  • Energy costs: Gas or electric for baking—$3 per batch.

Summing these, the total variable cost per batch is approximately $30.

Calculating the Breakeven Point and Required Sales Revenue

To calculate the breakeven number of batches, a target selling price per batch must be decided. Let’s assume the cookies are marketed at $60 per batch, which aligns with premium-quality products.

Breakeven Batches = Fixed Costs / (Selling Price per Batch - Variable Cost per Batch)

= $2,300 / ($60 - $30)


= $2,300 / $30


= approximately 77 batches per month

The corresponding sales revenue at breakeven is:

 Revenue = Number of batches * Selling price per batch

= 77 * $60


= $4,620 per month

Annually, this amounts to $55,440, which provides a baseline for profitability calculations.

Developing a Proforma Income Statement

To project profitability, the income statement must account for total revenue, costs, and desired salary. Assuming a goal to pay the owner a $50,000 salary annually, total annual fixed costs, variable costs, and additional expenses should be incorporated.

Based on the previous estimates, annual fixed costs are:

  • Fixed costs: $2,300 * 12 = $27,600

Variable costs depend on production volume. To achieve profitability, sales must cover fixed costs, variable costs, and salary. Using the breakeven volume of approximately 77 batches per month, the annual volume is about 924 batches.

The total variable costs are:

  • 924 batches * $30 per batch = $27,720

The total costs combine fixed and variable expenses, plus salary:

  • Fixed Costs: $27,600
  • Variable Costs: $27,720
  • Owner’s Salary: $50,000

Summing these, the total annual expenses are approximately $105,320.

To generate this revenue, the total sales revenue required is:

Total Sales Revenue = Total Expenses + Owner’s Salary

= $105,320

If each batch is sold at $60, then total required batches are:

Number of Batches = Total Revenue / Price per Batch

= $105,320 / $60


≈ 1,756 batches annually, or about 146 batches per month.

Therefore, the monthly sales volume to sustain profitability, including owner’s salary, is approximately 146 batches, translating to a monthly revenue of:

146 batches * $60 = $8,760

This comprehensive financial projection demonstrates how the cookie business can be structured to be profitable while paying your friend a competitive salary.

Conclusion

Launching a profitable cookie business requires careful analysis of costs and sales strategies. By accurately estimating fixed and variable costs, calculating the breakeven point, and developing realistic income projections, entrepreneurs can set achievable goals. Emphasizing quality, effective marketing, and efficient operations will further ensure sustainable growth and profitability. This planned approach provides a solid foundation for your friend's new venture in baking, marketing, and selling premium cookies.

References

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