Holsom Cakes is an independent gourmet bakery specializing in special occasion cakes. Being a small operation Holsom is a price taker. The current market price for cakes similar to Holsom's is $40. Holsom incurs monthly fixed costs for rent, equipment depreciation and salaries of $7,500. While there are small differences between cakes management believes using the average cost for ingredients and variable overhead of $12 would be sufficiently accurate for planning purposes. Holsom's owners believe they will sell 300 cakes per month at the market price of $40.
Required:
1. Can Holsom's owners earn an 18% annual return on their invested capital of $200,000 under this cost structure and pricing?
2. What is the minimum number of cakes Holsom's would have to sell in order to earn the owners' desired rate of return on investment?

Question

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The Answer of Holsom Cakes is an independent gourmet bakery specializing in special occasion cakes. Being a small operation Holsom is a price taker. The current market price for cakes similar to Holsom's is $40. Holsom incurs monthly fixed costs for rent, equipment depreciation and salaries of $7,500. While there are small differences between cakes management believes using the average cost for ingredients and variable overhead of $12 would be sufficiently accurate for planning purposes. Holsom's owners believe they will sell 300 cakes per month at the market price of $40.
Required:
1. Can Holsom's owners earn an 18% annual return on their invested capital of $200,000 under this cost structure and pricing?
2. What is the minimum number of cakes Holsom's would have to sell in order to earn the owners' desired rate of return on investment?

Holsom Cakes Is an Independent Gourmet Bakery Specializing in Special