Reference no: EM132516535

Vivian Lopez and Loren San will be opening a pastry store called Tasty Desserts. They are opening in two weeks and have still not decided how much to charge for their cakes and how much they should spend on advertisements and promotions.

The following information is available:

Tasty Dessert's variable costs per cake $10

Tasty Dessert's fixed costs for the year $12,500

Maximum production capacity for the year 5,000 cakes

Tasty Dessert's selling price per cake ?

Advertising budget ?

Competitor's selling price per cake (offer similar cakes as Tasty Dessert's) $20

The two owners had the following discussion regarding the selling price and advertising budget:

Vivian: Opening day is in two weeks! Loren, we really need to figure out how much we'll be selling our cakes for and our advertising budget.

Loren: As a new store, I think we should charge the same rate as our competitors and advertise our store on the radio and local review blogs. I anticipate that these advertising expenses will increase our fixed costs by $3,000.

Vivian: Well, I think the best way to attract customers is to sell our cakes cheaper than anyone else. I'm thinking we should charge 10% lower than our competitor's rate. As for advertising, I don't think we need to spend money on advertisements at all. We can simply create Facebook group and invite a bunch of friends and families. This way, we will generate more sales. In fact, I think we can potentially increase sales by 1,500 cakes.

Loren: I agree that we will probably sell more cakes if we charge 10% lower than our competitors. However, I don't think we will be able cover our fixed costs if we reduce our prices. We should also be concerned with breaking even as quick as possible.

Whose suggested strategy should be recommended? Assume that 5,000 cakes will be sold.

Question a) Calculate and graph the break-even point.

Question b) Calculate the profit is Plan Loren is implemented.

Question c) Calculate the profit is Plan Vivian is implemented.

Question d) Comment on which strategy should be implemented and why. Also comment on your recommendation for Tasty Desserts.