Question

Exercise 3-3 Julianna Abdallah owns and operates FirstCakes, a bakery that creates personalized birthday cakes for a child's first birthday. The cakes, which sell for $48 and feature an edible picture of the child, are shipped throughout the country. A typical month's results are as follows: Sales revenue $646,080 Variable expenses 484,560 Contribution margin 161,520 Fixed expenses 100,920 $ 60,600 Operating income What is FirstCakes' contribution margin per unit? Contribution margin per unit $ per cake LINK TO TEXT LINK TO VIDEO What is FirstCakes' monthly breakeven point in units? Breakeven point cakes

Answer 1

(a) First we will calculate the total number of units as below:

Total number of units = Sales revenue / Selling price per unit

Total number of units = $646080 / $48 = 13460

Now, we will calculate contribution margin per unit as below:

Contribution margin per unit = Contribution margin / Total number of units

Contribution margin per unit = $161520 / 13460 = $12

(b) Break even point in units = Fixed expenses / Contribution margin per unit

Break even point in units = $100920 / $12 = 8410

(c) Contribution margin ratio = Contribution margin / Net sales revenue* 100

Given: Fixed expenses = $100920, Net sales revenue = $646080

Putting the values in the above formula, we get,

Contribution margin ratio = $161520 / $646080

Contribution margin ratio = 0.25 or 25%

(d) Break even sales = Fixed expenses / Contribution margin ratio

Given: Fixed expenses = $100920, Contribution margin ratio = 25%

Putting these values in the above formula, we get,

Break even sales = $100920 / 25% = $403680