Amy’s Gingerbread Houses

Amy’s Gingerbread Houses

Amy Devorah has a part-time business of producing and selling gingerbread houses at craft fairs.  To meet health codes (and to avoid the ‘helping hands’ of her three young children), she rents a kitchen at a nearby preschool and bakes and decorates the houses there. The rent per day is $60, and the kitchen is available for up to four Saturdays (8am – 8pm). She can produce 45 houses in a day. Materials costs amount to $2.50 per house.

The houses are sold at various craft shows throughout the community Amy Devorah charges whatever the market will bear at each show.  Four shows have been announced this year.   For some reason, all of this year’s shows are being held at the same time (9am – 5pm on the indicated days), thus forcing her to choose which one she will attend. A description of each show with the anticipated selling price and specific costs is as follows:

Alternative A:  A private athletic club with an elite membership sponsors this two-day event.   It charges a flat fee of $150 for each seller.  Amy Devorah feels a selling price of $22.75 per house is appropriate.   From past experience, she knows she can sell 45 houses.

Alternative B:   A two-day neighborhood craft fair is held in the lower-middle income section of the city.  She will charge $19.95 per house and must pay an entry fee of $50 per day.  She can sell, at most, 65 houses.

Alternative C:  This one-day bazaar is held in a community senior center.  Here the price of each house would be a bit lower at $18.50.   The center charges $80 to rent a booth.  Based on last year’s records, she thinks that she can sell 50 houses at this event.

Alternative D:   The local university sponsors a three-day bazaar and charges each seller 10 percent of the gross revenue from sales as a fee.  Because of the student population, she will charge $15.00 per house.  She thinks she can sell 100 houses during the three days.

Amy has asked for your advice on her selection. You previously consulted with Amy to incorporate her business, so you are aware that Amy also works a full-time job. Although the extra income is certainly welcome, she runs this business as a creative outlet and to interact with the community. She also highly values time with her family, and wants to maintain that balance to the best of her ability – enough that she wondered how many houses she would have to sell at each fair without losing money. She also mentioned that her friend is available that weekend, and had offered to staff a second craft fair.

Required:

Prepare a memo addressed to Amy Devorah summarizing your findings. In your memo, be sure to address these points:

1.  Which of the four craft fairs would you recommend Amy to attend? Explain and support your recommendation.

2.  How much would you recommend Amy pay her friend to staff the second craft fair? Explain and support your recommendation.

3.  Include a contribution margin income statement analysis of the four alternatives, as well as any other calculations needed to support your recommendations.