Reference no: EM132889425

Question - Marie's Cake Company (MCC) is a very small scale producer of holiday season mini cupcakes located in central Connecticut which operates primarily around the Holiday season.

Marie's entire annual production takes place over a single weekend in early December, during which a maximum of 3,000 cupcakes of varied flavors can be produced and packaged into boxes of thirty cupcakes each. For purposes of this problem, assume that all cupcakes have identical costs.

Currently, Marie produces 2,400 cup cakes during the weekend. Variable costs consist of materials and boxes. The cost of other direct materials (such as essence, baking powder are insignificant, and thus ignored). All other costs, including facilities, overhead, and labor, are considered fixed costs. Each box can be sold for $4. Ignore taxes throughout the problem.

Cost to produce 2,400 cup cakes

Variable Costs

32 pounds of flour, sugar, butter mix @ $5/pound $160

80 boxes @ $0.50/box $40

Fixed Costs $200

Total Cost $400

Over the past several years, Marie has received numerous customer requests for specialty boxes, containing just one type of cupcakes (her chocolate cupcakes are very popular). Marie is therefore considering offering specialized boxes as a new product line. While the cupcakes themselves would be the same as before, they would be packaged in a smaller box, costing $0.20 each. The smaller box would hold twelve cupcakes, and be sold for $2 per box. Adding the new product line would have no effect on existing costs, including the fixed costs.

Assuming that MCC completely shifted over to producing specialty boxes, and that they produced as many as possible, how much profit would MCC earn?

If MCC were to produce a mixture of both regular and specialty boxes, what is the smallest number of specialty boxes which would need to be produced in order to break-even? Assume that total production is at the maximum of 3,000 cupcakes, and that MCC can sell whatever is produced.

Currently, Marie pays her only employee a fixed salary of $120 for the weekend. She is considering changing this to a per cupcake piece rate of $0.05/cupcake. Assuming that MCC faces future uncertainty about volume, what would be one advantage and one disadvantage of paying a piece rate, in terms of MCC's future profitability (assume that operationally, this would have no effect)