Question

Cove's Cakes is a local bakery. Price and cost information follows: $ 15.01 Price per cake Variable cost per cake Ingredients Direct labor Overhead (box, etc.) Fixed cost per month 2.18 1.03 0.12 $4,905.60 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 $1.70 per cake. Break-Even Point - cakes ] b. Fixed costs increase by $490 per month Break-Even Point - cakes ] cakes c. Variable costs decrease by $0.28 per cake. Break-Even Point . cakes ] d. Sales price decreases by 50.50 per cake. Break-Even Point cakes 2. Assume that Cove sold 445 cakes last month. Calculate the company's degree of operating leverage (Do not round intermediate calculations. Round your answer to 2 decimal places.) Degree of Operating Leverage 3. Using the degree of operating leverage calculated in Requirement 2, calculate the change in profit caused by a 10 percent increase in sales revenue. (Round your final answer to 2 decimal places (i.e. .1234 should be entered as 12.34%.)) Effect on Profit

Answer 1

ANSWER:

Contribution margin per unit = sales price per unit - variable cost per unit

Break even point (unit sales) = fixed expenses/contribution margin per unit

variable cost per unit= $2.18 + $1.03 + $0.12 = $3.33

(a)

new sales price per unit = $15.01 + $1.70 = $16.71

contribution margin per unit = $16.71 - $3.33 = $13.38

therefore,

Break even point (unit sales) = $4905.60/$13.38

= 367 cakes

(b)

new fixed cost = $4905.60 + $490 = $5395.60

contribution margin per unit = $15.01 - $3.33 = $11.68

therefore,

Break even point (unit sales) = $5395.60/$11.68

= 462 cakes

(c)

new variable cost = $3.33 - $0.28 = $3.05

contribution margin per unit = $15.01 - $3.05 = $11.96

therefore,

Break even point (unit sales) = $4905.60/$11.96

= 410 cakes

(d)

new sales price per unit = $15.01 - $0.50 = $14.51

contribution margin per unit = $14.51 - $3.33 = $11.18

therefore,

Break even point (unit sales) = $4905.60/$11.18

= 439 cakes