You are planning to open a bakery that specializes in cupcakes. You know that the variable cost to make one cupcake is $0.50 and you expect to sell them for $3.00 each. The location you are considering has a fixed cost (rent, utilities, taxes, etc.) of $5,000 per month. You are unsure what the demand for your cupcakes will be, but have done some market research and estimated the following demand scenarios and probability of each level of demand.
Demand Level: Low Demand, Monthly Cupcakes Sold: 1,500, Probability: 30%
Demand Level: Medium Demand, Monthly Cupcakes Sold: 5,000, Probability: 50%
Demand Level: High Demand, Monthly Cupcakes Sold: 12,000, Probability: 20%
a) How many cupcakes do you need to sell each month to break even?
b) What is the total monthly cost (fixed plus variable) for your bakery if there is low demand for cupcakes?
c) What is the expected value of total monthly cost for your bakery?