Option 1:

Assuming that Thatcher is able to successfully generate demand for 400 dozen of either custom or
standard cupcakes, her decision making will be aided by the following calculations:

Assumptions:
Input Custom Standard

Bottleneck Custom Decorations + Packaging Baking + Cooling

Bottleneck Time 83 minutes for 4 dozens* 22 minutes for 4 dozens*

Variable Labor (nos.) Thatcher + 1 Thatcher + 1

Sale Price/ dozen (US$) 51 30

Raw Material Cost/ dozen (US$) 6.9 5.58

Decoration Cost/ dozen (US$) 7.2 n.a.

Packaging Cost/ dozen (US$) 0.69 0.69

Variable Labor Cost/ hr (US$) 13 13

Total Time available/ month (hours) 270 270

Total Capacity/ month (Dozens) 270/(83/4/60) = ~780 270/(22/4/60) = ~ 2,950

* 2 employees (including Thatcher) can bake 4 dozens of custom cupcakes in 83 minutes. And with 83 minutes of
cycle time, we can easily produce 400 dozens of cupcakes. Therefore, don’t need to unnecessarily further reduce the
cycle time by hiring additional labor. Similarly, for standard cupcakes, 2 employees (incl. Thatcher) are able to
produce 4 dozens of standard cupcakes.

Financial Metrics:
In US$ per month Custom (in US$) Standard (in US$)

Sales 20,400 12,000

Raw Material Cost 2,760 2,232

Decoration Cost 2,880 n.a.

Packaging Cost 276 276

Rent 3,000 3,000

Fixed Salaries 5,000 5,000

Variable Labor (83/4/60)*400*13 = 1,798.33 (22/4/60)*400*13 = 476.67

Profit 4,685.67 1,015.33

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Based on the above calculations, if Thatcher has to choose between 400 dozens of custom or standard
cupcakes so as to maximize her profits, then Thatcher should definitely produce 400 dozens of custom
cupcakes.

Payback Period:

Considering that Thatcher invests ~ US$ 50,0001 (15-20% of sales) on marketing activities, and is able to
generate profits of up to US$ 4,686*12 = ~ US$ 56,200/ year. The investment could be recovered in ~ 1
year.

Option 2:

If Thatcher is able to successfully enough funds from angel investors and decides to open a local
storefront, we assume that the existing facility will be closed down and Thatcher will move her entire
production to the storefront. In addition, the following detailed analysis could be of much help to Thatcher
while framing her decision:

Assumptions (wherever possible, we will try to match the production levels and pricing of Sparkle):
Input Custom Standard Comments

Bottleneck Custom Decorations Baking

Bottleneck Time 75 minutes for 4 dozen 12 minutes for 4 dozen Time reduces in the storefront

Fixed Labor (nos.) 2 2 Thatcher and Assistant

Manager would not be
involved actively in operations

Raw Material Cost/ dozen (6.9 - 0.63)*0.95 = 5.96 (5.58 - 0.51)*0.95 = 4.82 Assuming no overage and 5%
(US$) discount on bulk

Packaging Cost (US$)/ 0.69 0.50

dozen

Fixed Labor Cost/ hr 12 12 With a store, we assume that

(US$) fixed labor would be employed

Total Capacity/ month 270/(75/4/60) = 840 270/(12/4/60) = 5,400 Demand for standard
(Dozens) cupcakes is capped at 1,800
* sale price, decoration cost, and total available time are the same as in Option 1
Financial Metrics:
In US$ per month Custom (in US$) @ 840 dozens Standard (in US$) @ 1,800 dozens

Sales 42,480 54,000

Raw Material Cost 5,003.5 8,669.7

Decoration Cost 6,048 n.a.

Packaging Cost 579.6 900

Rent 15,000 15,000

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 Fixed Salaries 8,750 8,750

Fixed Labor 6,480 6,480

Profit 978.94 14,200.33

Opting for standard cupcakes would have total capacity of 5,400 dozens; however only 1,800 dozens is
demanded in the market. Therefore, we can use the unutilized capacity to make custom cupcakes. The
additional profit generated from making custom cupcakes are as follows:

In US$ per month Custom (in US$) Comments

Total Time Available (hrs.) 270 - (12/4/60)*1,800 = 180 90 hours for 1,800 dozens of
standard cupcakes

Maximum Capacity (dozens) 180/(75/4/60) = 576

Sales 29,376 Sale price of US$ 51/ dozen

Raw Material Cost 3,430.94 Assuming no overage and 5%

discount on bulk

Decoration Cost 4,147.20

Packaging Cost 397.44

Rent - Already considered for standard

Fixed Salaries - Already considered for standard

Fixed Labor - Already considered for standard

Maximum Profit 21,400.42

Profit Comparison:
Only 840 Custom 1,800 Standard + 576 Custom

Total Profit (in US$)/ month 978.94 14,200.3 + 21,400.4 = 35,600.7

Payback Period:

Considering that Thatcher invests US$ 150,0001 (incl. Marketing, equipment, etc) into opening a new
store, and is able to generate profits of up to US$ 35,600*12 = ~ US$ 427,200/ year. The investment
could be recovered in ~ 5 months.

Option 3

Thatcher currently has a demand for 138 dozens of custom cupcakes per month, and operating a food
truck with a daily demand of 900 standard cupcakes (75 dozens) is something that seems possible, and
would help Thatcher generate additional sales. However, to decide whether or not to go ahead with this
decision, following analysis would be of much help to Thatcher :

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Assumptions:
Input Custom Standard Comments

Total Demand/ month 138 900/12*30 = 2,250 Demand can be met. No

(Dozens) constraint of labor or oven.

Bottleneck Custom Decorations + Baking + Cooling

Packing

Bottleneck Time 83 minutes for 4 dozens 22 minutes for 4 dozens

Sale price/ dozen (in US$) 51 40 33.3% premium over current

price for standard cupcakes
(similar to Sparkle)

Variable Labor (nos.) @ Thatcher + 1 2 Thatcher would be busy with

US$ 13/hr custom cupcakes. Therefore,
need 2 additional variable
labor for standard cupcakes.

Fixed Labor (nos.) @ US$ n.a. 2 Need 2 full time employees for
12/hr truck
* raw material cost, decoration cost, and packaging are the same as in Option 1

Financial Metrics:
In US$ per month Custom @ 138 Standard @ 2,250 Total
dozens dozens

Sales 7,038.0 89,991.0 97,029.0

Raw Material Cost 952.2 12,555.0 13,507.2

Decoration Cost 993.6 n.a. 993.6

Packaging Cost 95.2 1,552.5 1,647.7

Rent 3,000.0 Already included in 3,000.0

custom

Fixed Salaries 5,000.0 Already included in 5,000.0

custom

Fixed Labor n.a. 6,480.0 6,480.0

Variable Labor 620.4 5,362.5 5,982.9

Profit (3,623.4) 64,041.0 60,417.6

Payback Period:

Considering that Thatcher has already bought the truck and negligible investment is required for
operating from a truck, and if the Thatcher is able to generate profits of up to US$ 60,418*12 = ~ US$
725,000/ year. The investment could be recovered within a few days.

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