Question

Cove's Cakes is a local bakery. Price and cost information follows: $ 14.81 Price per cake Variable cost per cake Ingredients Direct labor Overhead (box, etc.) Fixed cost per month 2.28 1.13 0.24 $4,240.80 Required: 1. Calculate Cove's new break-even point under each of the following independent scenarios: a. Sales price increases by $1.60 per cake. b. Fixed costs increase by $465 per month. c. Variable costs decrease by $0.35 per cake. d. Sales price decreases by $0.30 per cake. 2. Assume that Cove sold 395 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 9 percent increase in sales revenue

Answer 1

Answers

• All working forms part of the answer
• Requirement 1

A	Price per cake	$                    16.41
B	Total variable cost per cake	$                       3.65
C = A - B	Contribution margin per cake	$                    12.76
D	Fixed Cost	$              4,240.80
E = D/C	Break Even point	332	Answer [a]
A	Price per cake	$                    14.81
B	Total variable cost per cake	$                       3.65
C = A - B	Contribution margin per cake	$                    11.16
D	Fixed Cost	$              4,705.80
E = D/C	Break Even point	422	Answer [b]
A	Price per cake	$                    14.81
B	Total variable cost per cake	$                       3.30
C = A - B	Contribution margin per cake	$                    11.51
D	Fixed Cost	$              4,240.80
E = D/C	Break Even point	368	Answer [c]
A	Price per cake	$                    14.51
B	Total variable cost per cake	$                       3.65
C = A - B	Contribution margin per cake	$                    10.86
D	Fixed Cost	$              4,240.80
E = D/C	Break Even point	390	Answer [d]

• Requirement 2

A	Price per cake	$                    14.81
B	Total variable cost per cake	$                       3.65
C = A - B	Contribution margin per cake	$                    11.16
D	Total cakes sold	395
E = C x D	Total Contribution margin	$              4,408.20
F	Fixed Cost	$              4,240.80
G = E - F	Net Income	$                  167.40
H = E/G	Degree of Operating Leverage	26.33	Answer

• Requirement 3

A	Change in Sales Revenue	9%
B	Degree of Operating Leverage	26.33333333
C = A x B	Effect on Profits	237.00%	Answer