Question

Cove's Cakes is a local bakery. Price and cost information follows: $ 13.81 Price per cake Variable cost per cake Ingredients Direct labor Overhead (box, etc.) Fixed cost per month 2.31 1.02 0.20 $4,112.00 Required: 1. Calculate Cove's new break-even point under each of the following independent scenarios: a. Sales price increases by $1.30 per cake. b. Fixed costs increase by $530 per month. c. Variable costs decrease by $0.31 per cake. d. Sales price decreases by $0.80 per cake. 2. Assume that Cove sold 410 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

Answer:

Sales price per unit = $13.81

Variable cost per unit = $2.31 + $1.02+ $0.2 = $3.53

Fixed cost = $4,112

1a. Sale price increase by $1.3 per cake

Revised Sales price = $13.81 + $1.3 = $15.11 per cake

Variable cost per unit = $3.53

Fixed cost = $4,112

Contribution margin Per unit = Sale price per unit - Variable cost per unit = $15.11 - $3.53 = $11.58

Break-even (units) = Fixed cost / Contribution margin Per unit = $4,112 / $11.58 = 356 cakes

1b. Fixed cost increase by $530

Sales price per unit = $13.81

Variable cost per unit = $3.53

Fixed cost = $4,112 + $530 = $4,642

Contribution margin Per unit = Sale price per unit - Variable cost per unit = $13.81 - $3.53 = $10.28

Break-even (units) = Fixed cost / Contribution margin Per unit = $4,642 / $10.28 = 452 cakes

1c. Variable Cost decrease by $0.31 per cake

Sales price per unit = $13.81

Revised Variable cost per unit = $3.53 - $0.31 = $3.22 per unit

Fixed cost = $4,112

Contribution margin Per unit = Sale price per unit - Variable cost per unit = $13.81 - $3.22 = $10.59

Break-even (units) = Fixed cost / Contribution margin Per unit = $4,112 / $10.59 = 389 cakes

1d. Sale price decrease by $0.8 per cake

Revised Sale price = $13.81 - $0.8 = $13.01

Variable cost per unit = $3.53

Fixed cost = $4,112

Contribution margin Per unit = Sale price per unit - Variable cost per unit = $13.01 - $3.53 = $9.48

Break-even (units) = Fixed cost / Contribution margin Per unit = $4,112 / $9.48 = 434 cakes

2. Degree of Operating Leverage if Sales are 410 cakes for last month

Degree of Operating leverage = Contribution Margin / Net Income

Particulars	Amount
Sales ( 410 cakes * $13.81 per cake)	$5662.1
Less: Variable cost (410 cakes * $3.53 per cake	($1447.3)
Contribution Margin	$4214.8
Less: Fixed Costs	($4,112)
Net Income	$102.8

Degree of Operating leverage = Contribution Margin / Net Income

                                                        = $4214.8 / $102.8

                                                        = 41

3. Change in Profit caused by 14% increase in sales

Degree of Operating leverage = % change in net income / % change in sales

% change in net income (profit) = Degree of Operating leverage * % change in sales

                                                          = 41 * 14

                                                          = 574%