Question

E6-4 Analyzing Changes in Price, Cost Structure, Degree of Operating Leverage [LO 6-4, 6-5] Cove's Cakes is a local bakery. Price and cost information follows: $ 14.71 Price per cake Variable cost per cake Ingredients Direct labor Overhead (box, etc.) Fixed cost per month 2.24 1.14 0.16 $4,914.80 Required: 1. Calculate Cove's new break-even point under each of the following independent scenarios: (Round your answer to the nearest whole number.) a. Sales price increases by $2.10 per cake. Break-Even Point cakes b. Fixed costs increase by $480 per month Break-Even Point - cakes ] c. Variable costs decrease by $0.42 per cake. Break-Even Point cakes

Answer 1

Ans.	Current situation:
	Price per cake	$14.71
	Less: Variable cost per cake
	Ingredients	$2.24
	Direct labor	$1.14
	Overhead	$0.16
	Total variable cost per cake	$3.54
	Contribution margin per cake	$11.17
	Fixed cost per month   =   $4,914.80
Ans. A	Calculations of Contribution margin per cake if selling price increase by $2.10 :
	Price per cake ($14.71 + $2.10)	$16.81
	Less: Variable cost per cake	-$3.54
	Contribution margin per cake	$13.27
	Break even point =   Fixed cost / Contribution margin per cake
	$4,914.80 / $13.27
	370 cakes
Ans. B	New fixed cost ($4,914.80 + $480) = $5,394.80
	Break even point =   Fixed cost / Contribution margin per cake
	$5,394.80 / $11.17
	483 cakes
Ans. C	Price per cake	$14.71
	Less: Variable cost per cake ($3.54 - $0.42)	-$3.12
	Contribution margin per cake	$11.59
	Break even point =   Fixed cost / Contribution margin per cake
	$4,914.80 / $11.59
	424 cakes
Ans. D	Price per cake ($14.71 - $0.30)	$14.41
	Less: Variable cost per cake	-$3.54
	Contribution margin per cake	$10.87
	Break even point =   Fixed cost / Contribution margin per cake
	$4,914.80 / $10.87
	452 cakes
Ans. 2	Contribution margin ($11.17 * 455)	$5,082.35
	Less: Fixed cost	-$4,914.80
	Net operating income	$167.55
	Degree of operating leverage    =   Contribution margin / Net operating income
	$5,082.35 / $167.55
	30.33
Ans. 3	Percentage change (increase) in net income = Operating leverage * Increase in revenue
	30.33 * 6%
	181.98%