I don't do cakes as a sole income so yes i can wait for years if need be. Not a problem, i have a good job.
That's great for you, but what about people who do this for a living?
My main question was what does it costs you to make a cake. I know that it costs me about $13 to make a two layer 8in cake with box and board.
A back-of-the-envelope estimate of the ingredient costs for an 8" cake is in the $8-10 range, but we buy our ingredients in bulk. Ingredient costs are dwarfed by labor and overhead (kitchen rental, insurance, and other legal stuff).
I would be very surprised if this illegal business had liability insurance (in which case they are putting their personal assets at risk) or filed a tax return (incurring the wrath of the IRS, which won't be as nice as the local health department). Ironically, if they did have a legal business, they would probably be able to deduct their losses against their personal income, which would save them money (or at least reduce their losses) in the long run.
Whats it cost you, and how do you lower your costs when costs are rising all over?
Once you get efficient processes and procurement (bulk purchasing) in place, your costs won't be going down, they will slowly rise due to inflation and commodity price increases. When costs go up, you increase your prices.
And not to continue a pesky subject, but I saw your comment:
" I am a firm believer of karma. And i think most of us started illegally. "
I refused to earn my money illegally so I waited until I was legal and think there are more gals (and guys) that take this route as well
I don't think K8memphis was advocating illegal cake decorating (correct me if I'm wrong, K8!) But many home bakers got started without realizing that they might need to be licensed. Or they sell just to family and friends and don't think that it "counts" as operating a home bakery. kwim?
BTW, I never sell cakes...I give them away.
And not to continue a pesky subject, but I saw your comment:
" I am a firm believer of karma. And i think most of us started illegally. "
I refused to earn my money illegally so I waited until I was legal and think there are more gals (and guys) that take this route as well
I don't think K8memphis was advocating illegal cake decorating (correct me if I'm wrong, K8!) But many home bakers got started without realizing that they might need to be licensed. Or they sell just to family and friends and don't think that it "counts" as operating a home bakery. kwim?
BTW, I never sell cakes...I give them away.
Yeah no no no no no not proposing illegal anything.
But yes tons of folks started out that way.
An earlier post mentioned that talking to them about how low their prices are might be a waste of time. I had that situation.
Way back when I was first starting out, a co-worker decided to also start decorating cakes. She wasn't very good and lots of co-workers made fun of her work, but me and another decorator kept encouraging her (we all start out with ugly cakes and it just takes time to get better).
One day me and the other decorator suggested she needed to raise her prices. She told us, "you guys are just upset that I'm your competition and I'm taking your business!"
Ok....if she wanted to get b*tchy about it, so be it. I told her, "At those prices you can HAVE that business! I won't lose money for my work."
Less than a year later, she had given up caking.
K8memphis
where you live they shut you down just because of a complaint? In my area the health dept contacts and educates the person and let them know how to become legal. Therefor, it's up to the baker to take the next step OR basically shut themselves down. I find it really sad that the community ostracized the two legal bakers-they probably spent alot of money and worked really hard to make quality products for the public. .
You are absolutely correct. There really is no misdoing here this is afterall public health.
What is the quality of the baked goods that they are selling so cheap? You get what you pay for. Maybe the people who are buying from her aren't really your target market anyway. I'm sure your cakes are better tasting and better looking than those cheap ones.
I remember WAY back when, the first time I ever charged for a cake. It was a 3-D Bear, from bear in the Big Blue house. It was AWESOME, but I remember I charged less than Walmart, because they were professionals at Walmart! 
I Charged $18 and made about $10, for 8 hours of work! I thought home-made meant cheap, it didn't occur to me you MAKE homemade for cheap, you BUY home-made for more!
I have figured out my costs (illegal, no insurance, not factoring in all the electricity, no advertising) cake supplies plus boards, is about .50 a serving. I just did an "at cost" cake for my FIL at that price, $80 for 160 servings, and I "made" (lol) about $8! 
I came to this price by simple math. $1 for the mix, .30 for the eggs, .15 for oil, $.75 for the box, .50 for 2 8" boards. Some cake foil, 2 lbs powdered sugar for $1.75, 2 cups alpine for $1.32, a little flavor. = $5.87 I can make a 7" out of that, 14 servings, divide cost by servings. Sometimes I don't need a box, (wedding) and sometimes I need more stuff, but I use this as a starting point. I always get my supports back, so I don't count that. I know I will be doing things differently once I start the business, but this works for now.
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