Question

Cakes by Jacki is considering adding a line of sugar-free cake options. Current sales revenue is $5,000 per month. With the new line added, revenues are estimated to be $6,500 per month. Ingredients and labor are currently $2,200 a month. Estimated total ingredient and labor costs with the new line are expected to be $3,000 per month. Jacki estimates that the utilities will increase from $500 to $575. Rent and other costs of $1,200 per month are not expected to change. Using differential analysis, the expected change in net profit from implementing the new line is $_________.

a. $725
b. $775
c. $800
d. $925

Answer 1

The expected change in net profit for Cakes by Jacki by adding a sugar-free line, calculated using differential analysis, is $625, which is not listed among the provided options (a. $725 b. $775 c. $800 d. $925).

Step-by-step explanation:

The student's question involves a scenario where Cakes by Jacki is considering a new line of sugar-free cake options and wants to use differential analysis to determine the expected change in net profit. We begin by analyzing the increase in sales revenue, which is from $5,000 to $6,500, resulting in an incremental revenue of $1,500.

The total costs are the sum of the ingredient and labor costs plus utilities, while the rent and other costs remain constant and do not affect the differential analysis. The ingredient and labor costs are expected to increase from $2,200 to $3,000, which is an increase of $800, and utilities are expected to rise from $500 to $575, an increase of $75.

Calculating the expected change in net profit, we subtract the total increase in costs from the increase in revenue: $1,500 (additional revenue) - $800 (additional ingredient and labor costs) - $75 (additional utilities) results in an expected change in net profit of $625.