Question

Cove’s Cakes is a local bakery. Price and cost information follows: Price per cake $ 14.11 Variable cost per cake Ingredients 2.15 Direct labor 1.03 Overhead (box, etc.) 0.20 Fixed cost per month $ 4,184.70 Required:

1. Calculate Cove’s new break-even point under each of the following independent scenarios:

a. Sales price increases by $1.20 per cake.

b. Fixed costs increase by $530 per month.

c. Variable costs decrease by $0.41 per cake.

d. Sales price decreases by $0.40 per cake.

2. Assume that Cove sold 420 cakes last month. Calculate the company’s degree of operating leverage.

3. Using the degree of operating leverage, calculate the change in profit caused by a 14 percent increase in sales revenue.

Answer 1

Ans.	Current situation:
	Price per cake	$14.11
	Less: Variable cost per cake
	Ingredients	$2.15
	Direct labor	$1.03
	Overhead	$0.20
	Total variable cost per cake	$3.38
	Contribution margin per cake	$10.73
	Fixed cost per month   =   $4,184.70
Ans. A	Calculations of Contribution margin per cake if selling price increase by $2.10 :
	Price per cake ($14.11 + $1.20)	$15.31
	Less: Variable cost per cake	-$3.38
	Contribution margin per cake	$11.93
	Break even point =   Fixed cost / Contribution margin per cake
	$4,184.70 / $11.93
	351 cakes
Ans. B	New fixed cost ($$4,184.70 + $530) = $4,714.70
	Break even point =   Fixed cost / Contribution margin per cake
	$4,714.70 / $10.73
	439 cakes
Ans. C	Price per cake	$14.11
	Less: Variable cost per cake ($3.38 - $0.41)	-$2.97
	Contribution margin per cake	$11.14
	Break even point =   Fixed cost / Contribution margin per cake
	$4,184.70 / $11.14
	376 cakes
Ans. D	Price per cake ($14.11 - $0.40)	$13.71
	Less: Variable cost per cake	-$3.38
	Contribution margin per cake	$10.33
	Break even point =   Fixed cost / Contribution margin per cake
	$4,184.70 / $10.33
	405 cakes
Ans. 2	Contribution margin ($10.73 * 420)	$4,506.60
	Less: Fixed cost	-$4,184.70
	Net operating income	$321.90
	Degree of operating leverage    =   Contribution margin / Net operating income
	$4,506.60 / $321.90
	14.00
Ans. 3	Percentage change (increase) in net income = Operating leverage * Increase in revenue
	14 * 14%
	196.00%